Interest only Loan – How Does it Work?

Different types of mortgage loans became popular during the period of 2001 – 2005 when the largest housing boom took place. This was the biggest housing boom since 1950s. During this period, lenders introduced different types of loan in order to help more and more people to purchase homes. One such home loan was the interest only (IO) loan. A large number of people have taken out interest only loans during this time in order to buy a property. The main reason for taking out such a loan is that the borrowers will be liable for paying a low monthly payment. In this loan option, you will only have to make interest payments toward the loan for a certain period of time. Thus, you will not have to make any principal payments immediately. After a certain period of time, you will be liable for making a lump sum payment toward the principal amount and lower it.

The working of interest only loan

Well, the work process of interest only loan is quite simple. In this loan option, the borrower will be liable for paying the interest on the principal balance on a monthly basis. As you will be paying off only the interest, your monthly mortgage payments will be quite low. This is the main reason why a large number of borrowers opt for this loan at website while purchasing an investment property or primary residence.

Interest only (IO) loans are mainly fixed rate mortgages. Thus, the rate of interest and the interest payments will remain fixed throughout the term period unless you refinance it to some other loan option. The best part of interest only loan is that it will help you in retaining liquid cash in your hand which you can invest in better investment schemes and earn good returns. Later on, you can use these returns to pay off the loan in full.

Deciding whether IO loans are best for me

Before you take out an interest only loan, it is quite important to know whether or not it is the best option for you. These loans are considered to be one of the best options for those people who are building or renovating their homes. These loans also come up as a good option for those borrowers who do not have much borrowing power. These loans are also considered to be one of the best short term loans. So, if you are looking for a short term loan, you can definitely consider this option. These loans are mainly available for a term of 5 – 7 years. The payment plan is such that it will allow you to settle down into making the mortgage repayment.

It should be noted here that interest only loans can be a best option for you if you take out a loan when the mortgage interest is going low. But as you will be liable for paying off a lump sum amount after a certain point of time, it will be better if you could start saving money for it since the inception of the loan.

Hope now you have a clear idea about the work process of an interest only loan.