What about Interest-Only Loan Options?

by Matthew Perry
(last updated February 21, 2009)

Interest-only loan options are awesome for some people, but not so good for others. You get a regular loan, but with the option of not paying on the principle of the loan (the amount of money you borrowed) for a set number of years, usually between five and ten. As a result, your monthly payments are just the interest on your loan.

This arrangement sounds really good at first, but the consequences of lower monthly payments may be more than you realize. If you pay only the interest on your loan, you still have a sizable payment every month because interest payments are highest at the beginning of a loan, and the principal, which is the amount you actually owe, doesn't go down. To make up for the time when you are only paying interest, you will have extra high payments when the interest-only term ends.

That makes them sound horrible, doesn't it? Interest-only loans do have their uses. If you can't make the payments on a standard loan at the moment you want to buy a house, perhaps you can make the smaller initial payments on a loan with an interest-only option. This would allow you to get a bigger loan, buy a more expensive house, and possibly cut out an expensive 'house swap' (getting your dream house first instead of moving into a not-so-dreamy house, saving up, and moving again). Investors may also find something to love about interest-only loans. The money that would have been paid on the principle can be invested in ways which generate more money, which can make up for the extra interest payments.

The time when interest-only loans make the most sense is in a booming real estate market. If house prices are going up, and you anticipate them rising steadily for three or four years, then you interest-only becomes very attractive. Why? Because the idea would be to sell your house in three to four years and cash in on the appreciation in your home's value, without the need to make large payments during that time.

Interest-only loans can be dangerous if you don't have immediate prospects for higher paychecks, better investment options, or higher home prices. In most cases, it's better (or at least smoother) to begin paying the principal on your loan immediately, so you are at less risk of defaulting on your loan.

Author Bio

Matthew Perry

MORE FROM MATTHEW

Internet Banking

Banking without the bank. I like the sound of that.

Discover More

Safe Deposit Boxes

These classy devices aren't a new invention; in fact, they've been around so long that a lot of people don't know exactly ...

Discover More

Understanding Points

Since when has a mortgage had anything in common with basketball, football, or hockey? Why do mortgage lenders keep talking ...

Discover More
More Money Tips

What Are Subprime Mortgages?

A subprime mortgage is the type of mortgage given to borrowers with credit scores below 620. You can avoid the high fees and ...

Discover More

Financing a Home

When you take out a mortgage it's always a bit exciting because that means you're closer to finally owning your home. However ...

Discover More

Picking a Mortgage Term

Picking a mortgage term is only one of the things you'll have to do when taking out a home loan, but fortunately it's one of ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 8Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is 7 - 0?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)