Most interest only loans cover a total period of 30 years. The borrower agrees to a lower interest rate for a specific time period (for example, the first 5 to 15 years). At the end of the specific time period, the loan converts to a conventional loan in which the remainder of the loan is paid off over the rest of the loan term in addition to the interest, insurance and taxes you were already paying. This usually means a much higher payment.
|Does the interest rate remain fixed or how will it vary with any index, margin or other factor?||?|
|Is there any prepayment penalty?||?|
|What happens if I refinance during interest only period?||?|
|Will the interest rate be lower when the initial interest only time period expires?||?|
|How will the principal balance and mortgage payments be affected if I make random contributions toward my principal loan balance during the interest only period?||?|
|Will I or an escrow pay my own homeownerís insurance and property taxes during the loan?||?|
Pros & Cons of Interest Only Loans
Lower monthly payments because you're not paying principal.
Allows prudent/competent investor to place extra into better returns.
If market appreciates, you gain.Defer larger mortgage payment so you can get larger home now.Qualify you for a bigger loan. Deduct the entire mortgage payment during interest only period instead of monthly difference in interest.
You donít build any equity in the ownership of your home in the initial interest only period because you donít pay any loan principal.
If housing prices drop during the interest-only period, you lose equity & owe more than home is worth. If you have to sell, you could wind up paying to get out of the loan because you haven't cut into the principal.When you refinance your home, will the interest rate at that time be lower when the initial interest only time period expires?
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