Interest Only Loans

Interest only mortgage loans are getting a bad rap.  When used responsibly and knowledgeably interest only loans can be a spectacular tool to pull out of your financial toolbox.  A recent article was written about interest only loans that mentions the advantages.  A lot of times customers buying second homes or vacation homes but want to do so without depending on financing or need to sell another home first. However using a 10/20 interest only loan can make buying that second home possible.  For example, say you own a condo in Florida worth $650,000 in a hot market but with the current crunch is really only marketable at $500,000.  Instead of waiting to sell the condo this product allows you to basically take out a loan on the equity of the condo that you already own to buy a new second home elsewhere.  So you could take out a 10/20 Interest Only loan for $400,000 and buy a home in the mountains of North Carolina without directly financing that home.  You would only be paying interest on the condo in Florida until the market improved and you were able to obtain more return for your investment plus any appreciation that occurred.  In addition, normally these loans can be found without incurring any pre-payment penalties.  So as soon as you are ready to sell the condo (which should take less than 10 years to normalize the market) you can pay the original interest only loan off in full without paying the pre-payment penalties most loans generally have.  Since interest rates have decreased this is also a good option since you will only be paying the interest each month.  I would only recommend this financing tool if you plan well.  Meaning if you are acquiring another property and plan on paying off the loan before the interest only term is over you should be fine.  Where you could run into trouble is if you maintain the loan past the interest only term since your payments would increase (sometimes dramatically).  Again, used wisely and responsibly interest only loans can be a great asset.  Let me know your thoughts!

http://www.lsnjlaw.org/english/placeilive/iownmyhome/gettingamortgage/interestonly/