I visited a lender and they were telling me something about 'Interest Only Home loan'. Can you please explain me in detail what does that stand for?

[roxette]

Hi Rebecca

Welcome to the forums.

These are the types of loan where you have the option to pay just the interest only. If you chose to pay the principal amount along with the interest, you can choose the amount during the starting period. These Interest Only home loans are offered for a 30 year period based on fixed rate or adjustable rates. But the ‘interest only' period will range from three, five, seven or ten years.

These types of loans have a lower monthly payment plan in comparison to the traditional loans where you have to pay along with the principal amount. However, this will not change your rates of interest. During the interest only period, you can tailor your payment amount and the cash flow in any given month.

You can save a lot of money through this offer. If you take a loan for a 30 year period at a fixed rate, approximately, 70% of the amount will go towards interest only during the first 5 to 7 years of the loan plan. If you have taken the loan at a lower rate of interest, then you should make this move. Instead of paying the low rate loan, invest on something that will give you a higher rate of return or make the payments to your higher interests' debts, like the credit cards. Doing this, you will be able to save thousands of dollars over a period of 5 years. This will be considered as a wise financial decision.

Regards
Roxette

[Taquita]

Just a quick FYI, a if you take a 15 year fixed rate morgage over a 30 year frm, your payments are only 15 to 20% higher and your loan is paid off in half the time.

[homefinance]

What is an interest only loan?

An interest only loan does not mean you will never pay principal on a home loan. These mortgage programs have what's known as an interest-only payment option attached to the note. In all cases the note will state how long your interest-only payments will last. Let's use a 5 year interest-only loan for example. On a typical 5 year fixed rate under an interest-only program the interest rate is fixed for the first five (5) years of the loan term and your only obligation are interest-only payments during this term. During the beginning of the 6th year (month 61) the unpaid balance is fully amortized over the remaining term and the borrower is now obligated to make principal and interest payments to the lender. Think of it as taking a 25 year mortgage (principal & interest payments) on an adjustable rate note tied to the then current interest rates.