Beware the Interest Only Craze

With home prices on the rise and the American appetite for larger, bigger, more expensive homes – interest only loans are becoming more and more popular. Interest only loans is where you only pay the interest on the monthly mortgage balance. The principle remains the same. You do have the option of paying down some of your principle, in which case the interest you owe next month is recalculated (it will be less).

This is a great program for those that are starting out and want to get into a house. They want to capture equity and move into a home suitable for their needs (maybe even a one step higher). Only do this though if you are expecting to receive higher income in a short time frame. For example, if you are an intern at a company and you think you will be hired permanently in the next few months and you want to get settled into a home – then an interest only loan is for you. You can get in at an affordable rate, and then once your income rises you can make principle payments and start knocking out that loan.

However, I would not suggest this loan program for those that have no assurance of being able to pay off the principle on their own. In this case you are not paying the principle and your balance stays the same as time ticks along. Then when the payments increase after a specified time (10 years in most cases) you can really be stuck with a large monthly payment.

If you get an interest only loan because you want that house you can’t really afford, then you’re not making a very good financial decision. The interest only loan is a tool you should use to further your financial goals and not a fall back plan to live in a house you really can’t afford.

There is a lot more to interest only loans than what I’ve discussed. If you have questions send me an e-mail and I can go over specific questions.
Remember to visit or for all your home financing needs.

This site is for informational purposes only. It is not sponsored or in any way affiliated with the government. If you are in need of a mortgage loan, consult with a licensed mortgage professional. All fair housing and equal housing opportunity laws apply when applying for a mortgage or buying a home. Copyright 2012.