Interest Only Loan

An interest only loan is paying only the interest each month until loan maturity, resulting in lower monthly payments, with the principal balance (the amount you borrowed) unchanged. This means that none of the monthly payment is going towards the original loan. At the end of the interest only period, you will still owe the full amount you borrowed.

However, you can make payments towards the principal if you make sure that when you take out such a loan there are no prepayment penalties. Most people make big payments on the principal balance of the loan when commissions and/or bonus checks are received. By making additional principal payments during the interest only period, you will reduce the amount you need to pay in the later months of the loan. Also, make sure you can refinance at anytime, if you choose to, without a penalty.

At maturity of an interest only loan, usually 1 to 15 years, the principal is paid back in a lump sum, or, if it is an option, you can refinance by converting the loan to a principal and interest payment loan, if it doesn't convert itself at maturity.

If you are considering an interest only loan, be aware that interest only loans can have a fixed interest rate or an adjustable interest rate. A fixed interest rate is an interest rate that stays the same during the life of the loan. An adjustable interest rate, also called a variable rate, is an interest rate that can change during the life of the loan, affecting your interest only payment. If interest rates go up, so will your interest only payment. Most adjustable rates have caps, which is a limit on the amount the interest rate or monthly payment can increase. Check to see what that would be.

Interest only loans may be good for some borrowers, but may not be good for others. Interest only loans may be good for:
1. People who receive big commissions and/or bonus checks that would be applied to pay down the principal.

2. People who know their income will take a big jump in pay in the next few years, being able to afford higher payments when interest and principal become due in the later months of the loan.

3. People who are capable and disciplined enough to invest the "money not paid on the principal" properly, and are confident that they will make enough money on the investment and come out ahead at the end of the interest only period.

While low monthly payments may seem like a good thing, there are advantages and disadvantages of an interest only loan.

Some Advantages and Disadvantages Of An Interest Only Loan

Federal Laws
Major laws that govern financial institutions and protect individuals in their financial dealings

Organizations

Fannie Mae
Freddie Mac
Ginnie Mae
Nellie Mae
Sallie Mae

Consumer Info

Credit Bureau
Credit Report
Directory of Federal Agencies
Federal Trade Commission (FTC)
Identity Theft
Predatory Lending
Repair Your Bad Credit
Truth in Lending Act
Borrowers Beware

Miscellaneous

Private Mortgage Insurance (PMI)
Prepayment Penalty

Loanfactz.com Supporters