At first, an interest only loan, or even IO, would seem to be the perfect low interest loan for a period of five or ten years, you pay nothing but interest charges (which, on a a low interest rate loan, can be almost nothing in comparison with traditional mortgages), thereby lowering your payments as well as making it possible to purchase a more expensive house than you would have been able to pay for, otherwise. But let us stop just a second and see whether this particular low interest loan is really all it’s cracked as much as be.
The thing of a mortgage payment is that you possess two figures you’re dealing with first, the price of the house second, the price of the interest. Traditional home loans start off as mostly interest with a tiny part of your monthly obligations going towards lowering principle–that is, the cost of the house–but as the principle is gradually lowered, your amount of interest you’re having to pay each month begins to decrease, so that more of your payment goes in the direction of principle. The result is a kind of snowball effect that, especially with fixed rate mortgages, pays off your home within slow but steady segments no unpleasant shocks, no rude surprises.
With an interest just loan, however, you’re spending only interest for your first five to ten a long time. That tiny bit associated with payment on principle (which gradually raises to a large payment on principle as increasing numbers of of the principle is paid off and charges become smaller) is actually missing–which leads to a short term acquire, but, perhaps, a lasting loss. Because, the truth is, at the end of those five years, *you still have the entire repayment to make*, only now you’ve got only 25 years in order to spread payments more than, rather than 30 or even 35 years. This really is bad news for most homeowners, even if you have a low interest loan. This means a huge begin payments, and it ought to cause most people to believe long and hard about whether or not this kind of loan, low interest loan or otherwise not, is right for them.