What Is An Interest Only Loan?

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asked 3 years ago

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An interest-only loan is a mortgage in which the borrower pays only the interest amount on the principal balance (the principal amount remains unchanged), for a set term. At the end of the term which is generally five to ten years, the loan gets converted to a wholly amortizing loan, in which both the interest and principal are paid. By virtue of the interest-only loan, one can make reduced payments for the loan in the early years. This way, the borrower who anticipates his income to grow over the period of the loan term, can easily ask for a bigger mortgage for the purchase of a house.

An example: Let's say you have bought land with an interest only loan of $100000 at 9 percent for a period of 5 years. You have to pay the interest of $9000 yearly for 4 years. The $100000 principal along with the last bit of $9000 as interest payment is due when the fifth year ends.

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Starwin

answered 3 years ago

It's a rip off only benefiting the lender. You pay interest, and the principal never decreases. Should your income not increase, or cost of living rises above your income, you are stuck, the lender has received a nice income from you, and you still owe the same, providing you can still afford the payment. Avoid! Get conventional loan with no prepay penalties, have your attorney examine fine print if too much for you (worth the fee), and then you should have no surprises when you least need them.

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