For a while, that is.
Sooner or later, every interest only loan requires repayment of the principal (that's what makes it a loan, not a gift.) Home equity lines of credit, for example, are interest only loans that often have a "balloon" at the end of 10 years -- at which point you have to pay off the entire balance (often by refinancing the line of credit.)
These days, many people are choosing 30 year fixed rate loans with an interest only payment option. These have interest rates that will not change over the life of the loan, and in the first 10 (sometimes 15) years of the loan, the monthly payment does not include any principal -- so the payment is lower than it would be on a traditional amortized 30 year fixed rate loan. After the interest only period, the loan "converts" to an amortized loan with a payment calculated using the amount of time left before the 30 years is up. With a 10 year interest only period, for example, the loan converts to a 20 year fixed rate mortgage after the interest only period.
Bear in mind that the payment on a 20 year mortgage is higher than the payment on a 30 year mortgage (with the same balance and interest rate) -- because you have less time in which to pay it back.
Using an interest only mortgage may be right for you if you actually will put the resulting monthly cash flow savings to an intelligent use (such as investing in your business, maximizing your the employer matching contribution in a 401k plan or paying down liabilities with higher interest rates -- as long as you're not going to run those liabilities back up again.)
Using an interest only mortgage may not be right for you if it's the only way you can qualify for a bigger, better house.
The biggest risk in interest only loans comes in the sub-prime market, where they are used to allow borrowers to stretch themselves as far as possible, financially. A good rule of thumb is that if you cannot afford a traditional, amortized mortgage, you cannot afford an interest only mortgage either -- even if the bank offers you one.
What you should know: Interest only loans
In the last decade, interest only loans have become commonplace in America's first market for first mortgages. Lately, improper use of interest only loans has contributed to high foreclosure rates, and people see the words "interest only" and "risky" in sentences together more and more often.
An interest only loan is a loan in which, for a certain period of time, the borrower's monthly payment is not required to include any principal payment. That means that for a while, you only have to pay interest on the amount borrowed -- you don't have to pay any of it back.
Quick interest rates
| Program | Rate | APR |
| 30 year fixed | 6.375% | 6.623% |
| Jumbo fixed 30 | 8.500% | 8.652% |
| 5 year ARM | 5.750% | 6.159% |
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720.294.0152 fax
