Popular Myths of Interest Only Loans

As interest rates continue to rise people will start to look for alternative mortgage programs.  Interest-Only loans have come to the forefront of almost every lenders marketing campaign so many consumers now face the challenge of considering whether or not an interest-only loan is right for them.  With lower payments than traditional fixed rate loans it's easy to understand how one can find these very attractive programs from the surface.  However many people have the wrong idea about these loans.  Below are answers to some of the most common "myths" of interest only loans.

You never have to pay principal on an interest only loan?

All  interest only home loan programs have an "Interest Only Payment Feature".  This payment feature is only for a limited period of your loan term and not for the entire term.  Sooner or later your "Interest-Only" loan will turn into a fully amortized loan with Principal & Interest payments.

Interest only loans are for anyone who needs a lower monthly payment?

Wrong.  Dead Wrong.  Interest only loans are for a select group of consumers who usually have short term ownership needs, a high amount of savings and a much greater risk level.

Interest only loans have interest rates equal to the LIBOR Index.

Wrong.  Most interest-only loans have interest rates that are based on the LIBOR index PLUS a predetermined margin (margin varies by lender).  Your fully adjusted rate will never be simply equal to the LIBOR index.