IO’s: Low Interest Loan with High-Risk Costs

At first, an interest only loan, or even IO, would seem to be the ideal low interest loan; for a period of five or ten years, you pay nothing but interest expenses (which, on a a low interest rate loan, can be almost nothing in comparison with traditional mortgages), therefore lowering your payments and making it possible to purchase a more costly house than you would have been able to pay for, otherwise. But why don’t we stop just a moment and see whether this particular low interest loan is really all it’s cracked as much as be.

The thing about a mortgage payment is that you possess two figures you happen to be dealing with; first, the cost of the house; second, the price of the interest. Traditional mortgage loans start off as mainly interest with a little part of your monthly premiums going towards decreasing principle–that is, the cost of the house–but as the principle is actually gradually lowered, the particular amount of interest you’re having to pay each month begins to decrease, so that more of your own payment goes towards principle. The result is a type of snowball effect which, especially with fixed rate mortgages, pays off your home within slow but constant segments; no unpleasant shocks, no impolite surprises.

With an interest just loan, however, you’re spending only interest for your first five to ten a long time. That tiny bit regarding payment on principle (which gradually increases to a large transaction on principle as increasing numbers of of the principle pays off and interest rates become smaller) will be 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 payment to make*, only now you’ve got only 25 years in order to spread payments above, rather than 30 or perhaps 35 years. This is bad news for most property owners, even if you have a low interest rate loan. This means a huge jump in payments, and it need to cause most people to believe long and hard about whether or not this kind of loan, low interest loan or not, is right for them.

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