What you ought to know (#7)...

What does" interest only" (IO) mean?

An interest only loan means that you´re only required to pay the interest each month, and don´t have to pay any of the principal. Since lenders make money on the interest (and not on principal) they are willing to do this. The big advantage of these types of loans, is that the borrower´s monthly payments are kept low. The biggest disadvantage is that the principle is never paid down. When the borrower goes to sell their property, they would pay off the principle at that time. If the market has seen a decline in value, they may have to sell at loss, and come up with the difference, or make arrangements with their lender to do a short sale (which would show up on their credit report, affecting future purchases).

There is another advantage that most borrowers don´t even think of3;.if you were to take the extra money saved on the interest only loan, versus a fully amortized loan, and use that to pay down your principal, then you would see a dramatic change in your loan balance. You see, your interest only rate, is based on simple interest (the rate times the balance, divided by 12). If you pay the difference towards your principle, every month your interest payment would be reduced. The borrower could also skip a month here or there, if it happened to be a "low money month".

A lot of times you will see these types of loans in the form of an interest only hybrid, such as 3/1, 5/1, or 7/1 ARM´s. If the borrower has little money down, or doesn´t plan on paying any extra towards the principle, then these types of loans may not be the right fit.

Bottom-line, if your client has questions about loan products, you should have them talk with Arrowhead Home Loans