How To Survive This Housing Market With Interest Only Loans
The consequences of the recent subprime mortgage meltdown were severe. Because of the housing boom occurring from 2001 to 2005, a lot of people were investing in the market. Then it all ended with a bang.
Because of the rising home prices, lenders were constantly looking for ways to give more people the chance to buy a house. Almost any employed person could get a loan to amazing multiples of their income. One of the things lenders invented to give everyone a shot at home ownership was the interest only loan.
It's important to know the difference between principle and interest. When you look at a mortgage offer, the lender quotes you the principle and the interest. The principle is the amount of money your loan is for. The interest is the lender's fee, spread out over the entire duration of the mortgage.
Some people think that an interest-only loan is a mortgage form. It is not. An IO loan is an option that you can attach to any type of mortgage. When you attach the IO option, you only pay the interest portion of the monthly payment. You don't pay principle and therefore do not lessen the amount of debt you have on the house. It is an excellent option when housing prices are going up.
Now that home prices are leveling off, and in some areas going down, an IO loan has gotten more riskier. It doesn't mean that you should not think about it, but you have to be absolutely sure you can afford the monthly interest payments. If not, you will be looking at a much bigger debt if things go wrong. If you're sure about your ability to pay the interest, an IO loan can give you a much needed breather in these tough economic times.
Because of the rising home prices, lenders were constantly looking for ways to give more people the chance to buy a house. Almost any employed person could get a loan to amazing multiples of their income. One of the things lenders invented to give everyone a shot at home ownership was the interest only loan.
It's important to know the difference between principle and interest. When you look at a mortgage offer, the lender quotes you the principle and the interest. The principle is the amount of money your loan is for. The interest is the lender's fee, spread out over the entire duration of the mortgage.
Some people think that an interest-only loan is a mortgage form. It is not. An IO loan is an option that you can attach to any type of mortgage. When you attach the IO option, you only pay the interest portion of the monthly payment. You don't pay principle and therefore do not lessen the amount of debt you have on the house. It is an excellent option when housing prices are going up.
Now that home prices are leveling off, and in some areas going down, an IO loan has gotten more riskier. It doesn't mean that you should not think about it, but you have to be absolutely sure you can afford the monthly interest payments. If not, you will be looking at a much bigger debt if things go wrong. If you're sure about your ability to pay the interest, an IO loan can give you a much needed breather in these tough economic times.
About the Author:
Jill is a financial advisor writing about loans and mortgages. She also writes in Dutch about lening and geld lenen snel.
posted by Debt Consolidation Loan at
4:08 AM
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