What Are Interest Only Loans?

Interest only mortgage give you the option of paying just the interest or the interest and some specific amount in any given month. Usually, this applies for an initial period of time you have the loan. Most interest only loans are mortgages. Interest only loans, for example, can be 30-year mortgages which are interest only for the first five, three, or even ten years. The great benefit of interest only loans, of course, is that they keep monthly payments very low. Many interest only loans also allow great flexibility by allowing you to pay off some principal payment as well as the interest only. As with other loans, interest rates and terms and conditions of interest only loans vary widely, so if you are interested in these loans, you will have to research to find the loan with the best terms and rates for your specific financial situation. The main disadvantage of interest only loans, of course, is that you are not paying off your principal amount, in many cases, during the no interest payment. That may be scary. In interest only loans where the loan amount is $100 000 and the interest only term is seven years, you will still owe $100 000 after seven years of payments, if you have paid interest only. On the other hand, interest only loans can make a great deal of sense, especially to first-time home buyers on limited incomes and homeowners who will be in their houses less than ten years. In most cases, during a 30_year fixed_rate mortgage, nearly 70% of payments during the first six or seven years goes towards interest, anyway, so you are not really falling far behind on interest only loans - it only appears that way. Plus, if you invest the money you save on interest only loans, by the end of your interest only period you will have savings that have accumulated higher rates of return than the amount you have lost in not paying off your loan faster. There simply are not many financial penalties in interest only loans, even though they appear counterintuitive at first. If you have lots of credit card debt or other high interest debts, using the savings that come with interest only loans to pay off these debts can make great financial sense and can save you thousands. You will not even affect your home equity much through interest only loans - although you are not contributing to the principal amount, inflation is likely pushing the value of your house up, giving you home equity.

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