Is an interest only loan worth getting?

An interest only loan is actually an option on certain types of loans.  A 30 year fixed rate loan may have an interest only option.  A one year adjustable rate mortgage may offer an interest only option as well.  The interest only option is offered on loans to allow the borrower to make only the interest payment and no principal payment.  The principal amount of the loan will not change as long as the customer pays interest only.  The main consideration in deciding to use these loans is what the savings is provided by this option.  The mortgage calculator can compare the payments with principal and interest or interest only.  In general, the interest only option can increase the mortgage interest rate.  Even though the lenders will offer the interest only option, it is considered to have a slightly greater risk and the lender raises the rate on the loan to compensate for the added risk.  Make sure the increased rate is used in the mortgage calculator for accurate comparisons.  Part of the interest only option is that it applies to loan payments for a certain period of time.  After the time period expires the loan payments are recalculated to include interest and principal so the loan is paid off within a certain time period.  At this time, the monthly payment will usually rise rather substantially.  Use the mortgage calculator to evaluate the benefits compared to the disadvantages of a slightly higher interest rate, larger monthly payments in the future and be sure to know what the terms of the loan are that have the interest only option.

This entry was posted on Wednesday, December 10th, 2008 at 5:01 pm and is filed under Mortgage FAQs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.