What are interest-only loans? How are they structured and who are they right for? How do you avoid common mistakes people make when choosing interest-only loans?
Loans with the option of paying only the interest every month are called interest-only loans. These loans allow you to pay on the principal balance only when you want to or when it is convenient for you.
Most interest-only (IO) loans carry this option to pay the interest only for a limited amount of time, usually from 5 to 10 years. The remaining principal balance comes due at the end of the term.
IO loans can be a good choice for borrowers whose incomes tend to fluctuate from month to month.
However, this aspect of IO loans can be a pitfall for borrowers who are not disciplined enough to pay on the principal when they are not required to do so..
Borrowers who expect to see an increase in their income during the term of the loan should consider loans with IO options. First time homebuyers can also benefit from IO loans, if they expect to upgrade from their starter home to a bigger home soon.
Another advantage of interest-only loans is that they require lower initial payments,...
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