Interest Only Loan, How Does It Work

Interest only loan is the one that gives you the possibility of paying only interest as your monthly payment. In that way you will pay a very reduced amount of money as your monthly payment; compared to the amount of money you would be paying if you add the principal to your monthly payments. Interest only loans can be 30-year fixed-rate mortgages or adjustable rate mortgages. You may find interest only loans on the market, for the first three, five, seven or even ten years. Home prices are continuously raising, so many buyers are choosing the interest-only loans option to reduce their mortgage payments and gain more financial freedom.

The biggest advantage of an Interest only mortgage is that you will have a reduced monthly payment; in that way you will count with extra money for other purposes. But, on the other hand, the disadvantage of it is the fact that you will not be paying anything towards the principal balance of your loan. It's important to fully understand the risks, when you decide to buy a property with an Interest only Loan. For the lender, the big advantage is that all the lender's money will be busy earning interest and none will be unprofitable return of principal, which the lender then has to lend to another borrower to keep earning interest.

During the interest only term your monthly payments are as low as they could possibly be, and you may qualify for a bigger property as well as for a bigger loan amount at the same time; and your whole monthly payment qualifies as tax deductible interest during the interest only period. If you are like most first-time home buyers, you will probably keep your property for a few years only, and then you will be moving up to a better home. Mortgage principal reduction then isn't important to you. An interest-only mortgage could be ideal for you.

It's important to understand that during the period of time you are holding an interest only loan, your property is building equity just as if you would be holding a fix rate mortgage. The type of loan you choose to buy your property will not affect the equity of your home.

See Also:

An Introduction to Interest Rates
Interest is one of the more important aspects of dealing with banks and other lenders depending upon the type of account or loan that you're dealing with, the interest can either make you money or cost you money.A variety of different factors can determine how much interest you receive or how much ... more...

Interest Only Loans
These days, as people scramble for new and more creative ways to finance buying a home, the interest only mortgage is becoming more common and well known. An interest only mortgage is one in which you have the option of paying only the interest (or just the interest and a portion of the principal) ... more...

Substantial Savings from Low Interest Credit Cards
A host of low interest credit cards is already in the e-marketplace favoring those with a revolving credit - in other words, those who carry a monthly balance. The interest rates on these cards tend to be around 10% while the rates on normal cards could be as high as 16% to 18%. The interest rates ... more...

Mortgage Loan Basics: Interest Only Loans, Pay Option ARM
Mortgage Loan BasicsTo understand loans and mortgages we need to understand loan limits first. If your loan amount exceeds the amount below, you will qualify for a Jumbo Loan, which carries higher interest rate.One-Family (single family homes) $417,000 Two-Family(duplex) $533,850 Three-Family ... more...