IO’s: Low interest rate Loan with High-Risk Costs
Initially, an interest only loan, or IO, would seem to be the ideal low interest loan for a amount of five or ten years, you have to pay nothing but interest expenses (which, on a low interest loan, can be almost nothing when compared with traditional mortgages), thereby lowering your payments as well as making it possible to purchase a higher priced house than you would have been able to manage, otherwise. But let’s stop just a moment and see whether this particular low interest loan is really just about all it’s cracked up to be.
The thing in regards to a mortgage payment is that you have two figures you happen to be dealing with first, the expense of the house second, the expense of the interest. Traditional mortgages start off as primarily interest with a tiny part of your monthly premiums going towards reducing principle–that is, the cost of the actual house–but as the principle is actually gradually lowered, your amount of interest you’re spending each month begins to decrease, so that more of the payment goes in the direction of principle. The result is a kind of snowball effect in which, especially with fixed rate mortgages, pays off your home within slow but steady segments no nasty shocks, no rude or obnoxious surprises.
With an interest simply loan, however, you’re having to pay only interest for that first five to ten years. That tiny bit regarding payment on basic principle (which gradually boosts to a large repayment on principle weight loss 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 have only 25 years to spread payments over, rather than 30 or perhaps 35 years. This can be bad news for most home owners, even if you have a low interest rate loan. This means a huge jump in payments, and it ought to cause most people to believe long and hard about whether this kind of loan, low interest loan or otherwise, is right for them.