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Sunday, February 22, 2009

When You Should Choose an Interest-only Loan


The IO loan has become very popular in recent times. Despite it's popularity, not everyone is right for an IO loan. In this article, we'll look at a few factors you can consider when thinking about an IO-loan.

An Interest-only loan is a good choice when you expect your income to rise in the near future. If you've got a study to finish, or a promotion to come, you can choose the IO-loan. It gives you low monthly payments now and when the mortgage payments get higher you can afford it because you've gone up in income.

If you have ups and downs in your income, an IO-loan can give you the flexibility you need. When times are good, you can pay the interest and pay off some of the principle. When times are not so good, you can choose to pay just the interest and get by that month. One of the ups of an Interest-only loan is the fact that you can pay off principle without a penalty. Don't make the mistake of spending the extra money on other things than principle, or you'll get a nasty surprise at the end of your IO-loan.

A lot of first-time home buyers make the choice for an IO-loan because they can afford a higher mortgage amount with this mortgage option. The smart way of doing this is buying a starter house, wait until it rises in value and then sell it for a profit. The mortgage gets paid off and the profit can be used to buy a bigger house with a 'regular' mortgage.

An IO-loan calls for financial discipline. When times are good, or when you have money to spare, you can pay off some of the principle on your home. If you fail to do that, you will be hammered with higher mortgage payments eventually.

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