Can anyone explain interest only loans to me?

Sure. They are generally based on a 30 year amoritazation meaning that the loan payments are spread over that period, but the first “interest only” period of time has a payment that does not include any amount to pay down the original principle loan. The one’s I do are interest only for 10 years, and in the 11-30th year, the payment changes to include a principle payment t to pay down the loan so that it’s a zero balance at the end of the 30 year period. The payment can often be hundreds of dollars less per month, and this type of loan product has become very popular for investors that just want to keep their monthly cash flow manageable until they can sell the property. Good luck! Sandra

Thanks Sandra,

It sounds like a good deal.

I/O loans could be a good deal. As with any situation, it depends on your parameters.

As was previously mentioned, in the example of a 10 year I/O, it is I/O until the end of the term. In this case 10 years. The balance is then re-amortized over the remaining 20 years.

So if you have an IO loan and pay extra principal each month just like it was a 30 P&I loan then at the 10 year mark the payment is reamoratized based on the remaining balance and it would have a principal payment like a 30 yr loan and not a 20 yr loan, correct?

I was thinking of using this method for a rental that is right on the edge of cashflowing, then if I get hit with an expense and have to tighten the belt, I can drop down to the IO payment.

Thats an excellent idea! Do you know how to figure out what the payments would be? Is there some kind of calculator? (Once I find out how much the interest would be for me.)

I believe its straightforward. 100k loan at 6% would be (100,000 * .06) / 12

Don’t forget taxes and insurance though.

Thanks,

I never knew how to do the calculation. I had to find mortgage calculators.