Sunday, June 05, 2005

Interest Only Loans

As home prices continue to climb many prospective buyers are looking at interest only loans as a way to finance their home purchase. The rush to interest only loans as opposed to a traditional principal plus interest payment loan is simple... You can qualify for a higher loan amount on an interest only loan then a traditional loan. Not everyone is a good candidate for an interest only loan. While these loans may seem like the answer to a buyer's prayer of home ownership you need to be careful.

These loans are good for someone who plans to be in a home for 5 years or less, a buyer looking for a higher tax write-off or a person who may have another home to sell and wants to buy first then use proceeds from the sale to pay down the loan or refinance. Using an interest only loan in these cases may be a smart financial move.

It may not be a good alternative for a buyer who needs the low payment in order to qualify for a home purchase. This is especially true as we may be seeing a drop in the huge price increases that have been the norm for the last few years. Interest only loans are generally fixed for a short term 3-5 years then the loan reverts to a traditional adjustable rate loan. When the loan adjusts your payment could easily double. If you barely qualify at the interest only payment you will have major problems making a payment when the rates increase. Many purchasers believe ( based on values in the last few years) that they will just sell, make a profit and move on... Sounds great in theory but what if the market softens or prices drop? This is where people can get into trouble.

Interest only loans can be a good alternative to a traditional loan and can offer many benefits to a buyer but they should always be used carefully. It is a truism of California real estate that what goes up will come down at some point. So plan carefully, know exactly what the terms of a loan mean and how the payments may work, and plan for the unexpected as it may happen sooner then you think.

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