Interest Only Loans - Smart Financing Option?

An "Interest Only" Mortgage loan is a very popular alternative to
traditional fixed rates.

Pros
These programs can offer consumers greater purchasing power,
increased cash flow and a number of other benefits.

A 5 year interest only loan gives the borrower a fixed rate for five
years with the option to pay only the interest owed every month.

Cons
Unlike common libor interest only loans COFI or CMT loans are
advertised with rates as low as 1.45% and many of the so called
professionals that sell these loans do not realize they are not the
same as a pure interest -only loan.

These loans contain the possibility of negative amortization and if
you are financing above 80% of the value of your home it is almost
impossible to secure a second mortgage or home equity loan. If you
do, your rate will be something which will make you think about
reconsidering your first mortgage.

To find out if an interest only loan is right for you consider the
following questions:
How long do I plan on staying in your home?
What amount of monthly payment can I comfortably afford?
How much money do I have for a down payment?
Do I plan to pay the mortgage off early?
Do I intend to make extra principal payments?
Do I project an increase in income?

Also identify the true nature of the "interest-only" loan program. The Mortgage Loan Search Network, a resource for consumers at http://www.bcpl.net/~ibcnet, helps user to examine more closely financing alternatives tells users to ask specific questions about the true nature of a loan offer.

1. What is the interest rate on this mortgage?

2. How many discount and origination points will I have to pay?

3. What are my closing costs, and will you provide a good faith
estimate of these costs up front?

4. When can I lock in the interest rate and what will it cost me to
do so?

5. Is there a prepayment penalty on this loan?

6. What is the minimum down payment required for this loan?

7. What are the qualifying guidelines for this loan?

8. What documents will I have to provide?

9. How long will it take to process my loan application?

10. What might delay approval of my loan?

Obviously the interest only loan is not for everyone. The duration of the loan versus the time the borrower plans to stay in the home should be considered. What will rates be like when the fixed rate term expires? Can you afford to payoff the loan at that rate? Still the Interest Only loan has a good side and many advantages for those whose financial profile are the right match.