IO’s: Low interest rate Loan with High-Risk Costs
Initially, an interest only loan, or IO, would seem to be the best low interest loan for a period of five or ten years, you spend nothing but interest charges (which, on a low interest rate loan, can be almost nothing when compared with traditional mortgages), therefore lowering your payments and making it possible to purchase a higher priced house than you’d have been able to afford, otherwise. But why don’t we stop just a minute and see whether this low interest loan is really just about all it’s cracked up to be.
The thing in regards to a mortgage payment is that you possess two figures you are dealing with first, the expense of the house second, the price of the interest. Traditional home loans start off as mostly interest with a little part of your monthly payments going towards reducing principle–that is, the cost of the actual house–but as the principle is gradually lowered, your amount of interest you’re having to pay each month begins to lower, so that more of your payment goes in the direction of principle. The result is a kind of snowball effect in which, especially with fixed rate mortgages, pays off your home in slow but regular segments no unpleasant shocks, no rude surprises.
With an interest just loan, however, you’re having to pay only interest for that first five to ten many years. That tiny bit associated with payment on basic principle (which gradually raises to a large payment on principle as increasing numbers of of the principle is paid off and interest payments become smaller) is actually missing–which leads to a short term acquire, but, perhaps, a permanent loss. Because, the truth is, at the end of those 5 years, *you still have the entire repayment to make*, only now you’ve only 25 years in order to spread payments over, rather than 30 or 35 years. This really is bad news for most property owners, even if you have a low interest loan. This means a huge begin payments, and it ought to cause most people to think long and hard about whether this kind of loan, low interest loan or otherwise not, is right for them.