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 Are interest only loans good or bad?
  Getting out of an interest only loan
By the EchoBay Loans Expert
 Are interest only loans good or bad?
Dear EchoBay Expert: I found a home I want to purchase but I can't afford the monthly mortgage payments of a traditional 30 yr. loan. Should I get an interest only loan which has much lower monthly payments?

Dear Loyal Reader: For the average person, an interest only loan provides an avenue to home ownership when you cannot afford the traditional payments of a home. However, when you are considering this type of financing, it could be a short-term fix.

Obviously, with an interest only loan, you are not making any reductions to the principal. When you sell this house, you will owe the same amount you did when you originally took out your loan assuming you can sell it for at least what you paid for it.

If an interest only loan is the only way you can afford the payments, you should consider looking for a less expensive house. While it can be great when tax time rolls around because of the deduction, you are really no closer to home ownership than you were when you first took out your mortgage loan.

For certain borrowers, there can be advantages to interest only loans. If you have a job where the majority of your income is based on commissions or you expect to earn a large bonus at year-end, this type of loan can make sense.

With this type of arrangement, you can use your extra income to pay down principal. In doing this, you may pay off your home faster than you would with a traditional mortgage loan. Also, if you have solid investments for the money you will be saving each month, this could also be a way to have a home and a portfolio.

 Getting out of an interest only loan
Dear EchoBay Expert: It's been almost 10 years since I've had my interest only loan and now my payments are going to increase substantially since my lender requires I pay the principal part of my loan. My income isn't enough to cover my new payments. What can I do?

Dear Loyal Reader: If you want to keep your home, but you can't afford the payments that your loan is going to require once your interest only period is over, you may want to think about refinancing, and possibly into another interest only loan.

Since interest only loans can have lower initial interest rates than traditional fixed-rate mortgage loans, if your loan doesn't have a prepayment penalty you may be able to afford to send a few extra dollars in with your monthly payment, effectively paying down a portion of your principal even though you're still enjoying the low monthly payment that an interest only loan affords. If the idea of another interest only loan isn't appealing to you, you might want to reconsider your current housing situation.

You might also have to evaluate whether or not interest rates have risen to the point that even if you were to take out another interest only loan, you still wouldn't be able to afford the monthly payment. If you've purchased more home than you can afford, it might be time to consider less expensive housing.

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