Important information about Interest-Only loans
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Important things to know
Interest-Only loans have risks that other loans do not have. This information can help you decide if an Interest Only loan is right for you.Never sign any loan document unless you are sure you understand it.
• Your Monthly Payment Will Not Reduce the Amount You Owe. An Interest-Only mortgage allows you to pay only the interest on the money you borrowed for the first years of the loan. This is called the “interest-only period” (for example, the first 5 years of the loan). During the interest only period, your monthly payments will not reduce the amount you owe on your loan. In other words, at the end of the interest only period, you will owe the same amount that you did at the start of your loan unless you make additional payments to reduce the amount you owe.
• Your Monthly Payment Will Increase. On some adjustable rate Interest-Only loans, your payment amount may change during the interest only period because the interest rate has changed. No matter what type of Interest-Only loan you have, your monthly payment amount will change at the end of the interest only period. Even if interest rates stay the same, your new monthly payment will be higher unless you have made additional payments to reduce the amount you owe. Your monthly payment will be higher because:
o You will have to start paying back principal as well as interest.
o On adjustable rate Interest-Only loans, interest rates may have gone up.
• ASK:
What the payments on your loan will be after the interest-only period.
What the payment can be if interest rates increase (if you are considering an adjustable rate Interest Only loan).
With most interest only loans you can pay additional money that is above and beyond your minimum monthly interest only payment each month. With most interest only loans, this extra money paid will be applied directly towards the principal balance of your loan. This in turn will reduce the overall loan balance every time you pay extra. Interest only loans can be excellent financial tools when used properly. Consult a mortgage professional to see if this type of loan is right for you.
If you are sending additional money to be applied to principal, MAKE SURE the lender knows it's supposed to go towards principal. Some lenders will apply the extra money to your escrow account, which does not reduce your principal balance.
With an interest-only loan your monthly payment will be slightly lower. However, your interest rate will be slightly higher. Therefore, the interest you pay over the life of the loan will be higher.