If you are shopping for a house or refinancing, youve probably seen ads for interest-only loans. While this type of loan is beneficial for some homebuyers, other homebuyers might regret the decision to take out an interest-only loan.
Interest-only (IO) loans are structured so that the borrower pays the interest every month. The borrower is not required to pay on the principal balance, although the borrower does have that option.
Usually, this option to pay interest only lasts for a limited period of time, typically between 5 and 10 years.
This type of loan can benefit borrowers who have fluctuating incomes, or who expect to see an increase in their income sometime in the near future. Because the borrower has the option of paying on the principal when it is convenient, some borrowers feel more comfortable with IO loans, rather than other types of loans that require payments on the principal each month.
However, if the borrower does not pay down the principal at all, then the entire balance will be due at the end of the term. With IO loans, any unpaid principal must be paid or refinanced when the term is up.
Homebuyers looking for a starter home...
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