The Basics Of How An Interest Only Loan Works

Interest only loan works like this:

You arrange an interest only loan for X amount of dollars.

Then every month you pay the interest you accumulated on that loan, but not the principal.

That's the important thing to understand, so I repeat it.

You are NOT paying any part of the principal.

If you keep doing this, in 10 years, you will have exactly the same amount on your loan.

There are advantages and disadvantage in taking out an interest only loan.

If the price of your house goes up, you are okay.

If the price of your house goes DOWN, you will owe more money than your house is worth. It is called "UP SIDE DOWN."

So, to get rid of your house, you have to pay money to make up that difference.

Compare that to a conventional loan where you pay the interest plus principal. Your principal slowly goes down over time.

At the maturity of your loan, you have your house paid off. Meaning it is now YOURS.

With interest only loan, this will never happen, unless you pay more than what is required.