Most of the time borrowers will obtain mortgage loans that require the borrower to pay principle and interest on the property each month. Loans that do not have principle included to the monthly payments are referred to as interest only loans or “IO loans.” Back a few years ago when the housing market was at its peak, this type of mortgage was more popular than ever.
But many homeowners who have acquired this type of loan did not realize the dangers that came along with it. with allowing their clients to only make interest only payments on their property each month, many of these borrowers purchased a home that was well beyond there means. At first it seemed like a great idea because of the very low monthly payment, but when the borrower comes to understand they are not paying anything towards the houses equity, they quickly realize that with this route they will never officially own their home.
The most popular and common types of interest only mortgages do not allow the homeowner to make those IO payments for the life of the loan. Typically with an IO mortgage borrowers will go for a period of five to ten years until the principle is factored into the monthly payments. So because of this if you are one of many that is only planning on staying in the home for a few years a interest only loan may be perfect. Generally after the time frame is up the loan will then be fully amortized. With this the monthly payments will begin to increase but the balance of the loan will remain the same.
So with that said you now know the difference between a interest only loan and a regular mortgage. It is very important to analyze your current and future financial situation before obtaining any type of mortgage, especially an IO. Remember, it may be really appealing at first but later on when principle is included you must make sure you can afford the increase as well.