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Fernando, Home Buyer in Blythe, Califonia

What are the pros and cons of an interest only mortgage?

Asked by Fernando, Blythe, Califonia Tue Feb 5, 2008

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This article may be useful. They are neither good or bad, you just need to know how they work.
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0 votes Thank Flag Link Mon Feb 11, 2008
Positve. ++ For the same size payment, a larger loan can be serviced than an amortized loan.
Positive ++ For the same size loan, a smaller payment will suffice to service the loan.
Negative - - The loan will have just as high a balance after all the interest only payments as when you first started, (unless you voluntarily pay extra on the principal)
Negative - - The note interest rate, or the upfront fees (and the APR ) are slightly higher for loans that are in other respects nearly identical. (Borrower, Loan Amount, Property )

For example an amortized 30 year loan might be 5.5% APR compared to an interest only loan with a 5.75% APR.

APR means: Annual percentage rate that represents the true cost of borrowing by including most loan fees in the calculation. Loan fees are why the APR calculation can be higher than the note rate but never lower.

So the payment is lower on the i.o. (interest only loan) because you do not pay back any of the original borrowed principal ( except for voluntary (optional) principal payments, of your own choice ) ---
the cost of interest is slightly higher. In my example that .25 of a percent works out to an additional $250 per year per hundred thousand borrowed.
0 votes Thank Flag Link Tue Feb 5, 2008
Jim Walker, Real Estate Pro in Carmichael, CA
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