Interest Only Loans: When To Take The Risk

2007-03-08 10:33:40

( Financial )



Interest only loans with their very low monthly payments are very much tempting to aspiring home owners, but they are really not right for everybody. It is a big risk to assume you will have enough cash at some future date to pay off or refinance your interest only loans.

Interest only mortgage loans in particular may be right for people whose income is commission-based. It may also be perfect for a potential homeowner who does not have much cash right now but expects to earn a lot of cash in the future. It is risky, but this option is also favorable for people who have the cash but are investing it in a profitable portfolio that will make money in the future. This makes it easier for them to pay off the principal amount of their loan.

The perfect example of a customer for interest only loans would be the executive who earns moderate income every month but are paid very large bonuses several times a year. If you are this kind of customer, you can pay your interest every month, and then pay off a big chunk of your principal whenever you get your bonuses.

One big risk you can run into when you opt for interest only loans is borrowing much more than you can really afford. Another is if you lose your job and you are expecting your bonuses to pay off your principal. Your house can also lose its value. If you run into any of these untoward incidents, interest only mortgage loans may be disastrous to your financial health.

So weigh your options carefully. Interest only loans can offer you lower monthly payments, cash flow flexibility and ease. Interest only loans are a big risk but can also save you a lot of money.


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