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DID YOU KNOW?

The interest only loan differs from the standard loan or mortgage in that extra payments will decrease the monthly amount paid as well as the lifetime of the loan. With a standard mortgage, added payments decrease the life of the loan but the monthly payments remain the same. The interest only loan is a benefit to people who do not currently have the money to make large monthly payments but may be able to make sporadic large monthly payments.

Monthly payments on the interest only loan

The basic difference between the interest only loan and the standard home loan is the manner in which the monthly payments are calculated. When you accept a standard home mortgage, you agree to pay a certain amount each month until the loan is paid off. For example, you will pay five hundred dollars every month for your mortgage and that will not change until the very last payment when the entire mortgage has been repaid.

With the interest only loan, you are paying an interest percent which is calculated each month based on what is still owed on the loan. Let’s say that you pay ten percent in interest each month. The first month, you will pay ten percent of the total loan. The second month, you will pay ten percent of the amount which is the total loan minus the ten percent already paid. This means that any time you are able to make extra payments, over the interest only payment, on your loan, you will decrease the loan amount owed each month.

The interest rate

One drawback to the interest only loan is that the interest only loan often has a higher interest rate than the standard home loan. The interest only loan is a slightly riskier investment to lenders. Studies show that likelihood of failure to repay the interest only loan on time and in full is higher than that of the standard home loan. This increased risk makes lenders inclined to increase the interest rate on the interest only loan to make up for money that may be lost.

It should also be noted that the interest rate on the interest only loan might be subject to change. You should read the terms and agreements of the interest only loan carefully. The low interest rate offered by the interest only loan that seems too good to be true probably is and you should find that out by reading the fine print and asking questions of your lending institution before making any agreements to accept the interest only loan.

Length of the interest only loan

The interest only loan is a home loan and therefore the life of the loan is usually long – fifteen to twenty years. However, the period of interest only repayment is usually only five years. The length of the loan and the details of the interest only period of the loan should also be discussed with the lending institution.

An interesting note

The interest only loan is not actually a loan. The interest only loan is an option which can be added on to a standard home loan by working with the lending institution. The interest only loan is not a loan in and of itself even though it is called a loan.