How exactly do ‘interest only’ mortgage loans work? When do I pay on the principle of such a loan?
Written By: admin on December 30, 2009
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I know APR loans are a terrible thought, but how would an interest-only loan work? Would it still be a 30 year note, or do they extend the loan? Would I be able to get a fixed rate with an interest-only mortgage loan?
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Tags: apr loans, bad idea, fixed rate, interest only loan, interest only mortgage loan, Mortgage or Home LoansTags: apr loans, bad idea, fixed rate, interest only loan, interest only mortgage loan
In an interest-only loan or mortgage the borrower only pays interest each month. This makes it cheaper than a conventional mortgage, in which part of each month’s payment goes towards the principal and part goes towards interest. These loans have become well loved because the monthly payments are lower, allowing borrowers to afford a larger home.
But, these loans can be perilous, especially in a down housing market. The interest rates are generally fixed for the first 1, 3 or 5 years. After that, they convert to a conventional loan, with a higher monthly payment. Most borrowers take on these loans because they assume they will sell the home before the interest rate increases. In a down market, they may not be able to sell. If they cannot afford the increased payment, they may have to default on the loan, and foreclose on the home. So, when the rate starts to adjust, you would need to refinance again. And, either get a fixed or another interest only adjustable. And, yes, I do believe you mean ARM. Although, if you have extra money every so often, you can pay down the principal in extra payments.