Interest Only Loans
A Little Information

After seeing a TV commercial touting the monthly savings that could be realized by interest only loans I thought to myself, who could be that crazy?

Unfortunately many people do not look at these loans with common sense or good financial sense.

First of all, an interest only loan is a loan where you pay only the interest for a certain period of years after which you either re-finance, pay off the balance or start paying the principle. The term is usually five to seven years. In plain terms you will make payments for five to seven years and not have paid off any of the principle at all.

Let’s take a look at some “expert” advice to learn a little about interest only loans.

“Experts” say that interest only loans are recommended for those whose income is from infrequent commissions or bonuses.

I guess the experts figure that these people can buy a bigger house and then pay the principle off when the big commission or bonus checks come in. What happens when the big checks do not come in? This sounds like a recipe for disaster to me.

“Experts” say that interest only loans are recommended for those who expect their income to increase over the next several years.

This sounds like “the checks in the mail”. If you cannot make the payment today, do not buy it. There are no guarantees in the future for any of us.

“Experts” say that interest only loans are recommended for those who will invest the difference in an investment that they are confident will make a return.

This sounds like taking the money to the racetrack. There are a lot of problems here, first of which is you should never borrow money to invest, which is basically what this is. They would also have to have the discipline to actually invest the difference instead of spending it on something else. Finally, what guaranteed investments are there that you can be that confident in?

These are all just ways to get you into a house that costs more than you can afford and then, when you hit the first bump in the road, you’ve lost your house. You can use the math involved to make it look quite attractive, but do not be fooled.

Do not plan your finances around the best case; always have a plan for the worst case.

If someone recommends that you get an interest only loan, turn and run away from them as fast as you can.




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