Interest Only Loan

Some Advantages Of An Interest Only Loan:
1. Smaller monthly payments at the beginning of the loan.

2. Being able to buy more house now than one can afford, knowing that a future of increased earnings would make higher monthly payments more affordable later in the loan.

3. Using the money you don't pay on the principal for other investments that will make money.

4. If you do make payments towards the principal on an interest only fixed rate loan, the monthly payment will decrease, where as a 30 year fixed mortgage will have the same payments thoughout the entire loan.

5. The interest payment is tax deductible.

Some Disadvantages Of An Interest Only Loan:
1. Bigger payments when the interest only period is over.

2. If you pay nothing on the principal during the interest only period, you will have zero equity in your home except if your home appreciates in value, which may be risky with the changing market conditions. If property values go down, you could owe the lender more than your home is worth.

3. Such loans can result in payment shock when the monthly payment amount jumps skyward upon expiration of the loan's initial period. In other words, you have smaller payments at the begining, and much larger payments later.

4. Most mortgages require that you pay back interest and principal with each payment, such as a 30 year fixed rate mortgage, resulting in a paid off loan at the end. With an interest only loan, none of the required monthly payment is used to pay off the loan's principal, so if the interest only loan is for 10 years, you paid 10 years of pure interest to your lender.

5. If the interest rate is not a fixed rate, the reset rates on some interest only loans can be substantial.

6. Many borrowers are unable to keep pace when the payments increase, some borrowers will make the higher payments, many will struggle.

7. If the borrower can not make the payments when the interest and principal become due, the borrower will be forced to sell or lose their home to foreclosure.

Recap:
Long term fixed rate financing is a pretty safe way to go for many borrowers. A 15 or 30 year fixed rate mortgage paying interest and principal will pay off the entire loan at maturity.
With an interest only loan, nothing goes towards the principal during the interest only period unless you make a payment towards it.

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