Interest only (IO) loans are loans that provide the option to pay just the interest on a loan for an initial period of repayment, say 5 years or 10 years. It also gives the choice of paying the interest plus as much principal as you want. The main advantage of this loan is the low interest you pay each month even though the interest rate is the same as that on conventional loans. IO loans also help to control the monthly payment and cash flow each month. After the initial period, the repayments are raised to fully amortized levels. These loans allow for a large principle prepayment if desired.
Interest only loans can be fixed-rate mortgages (FRM) or adjustable-rate mortgages (ARM). Though it is generally felt that interest only loans have lower interest rates, this is not true. In fact, they may have higher rates, because the risk is greater in IO loans. While going for an interest only loan with adjustable rates, it is very important to consider what the future interest rates are likely to be. This is because repayment in the future will consist of both interest as well as the principle.
For interest only loans based on the adjustable mortgage rates, the interest rate is calculated and changed based on the index rate. The Index rate depends on the average of Interbank offered rates for one year US dollar denominated deposits in the LIBOR (London Interbank Offered Rate). This Index is published in the Wall Street Journal. The interest rate is adjusted according to the index plus the margin (rounded to the nearest 1/8 percentage point). The interest rate cannot change by more than 5.00 percentage points than the initial interest rate over the whole term of the loan. Similarly, it cannot decrease less than the margin on the loan. Interest only loan products can be 30, 20, 15 or 10 year fixed mortgage with varying adjustable rates.
With increasing real estate prices, interest-only loans are becoming a preferred option for many. There are also many lending companies that are giving attractive options on interest-only loans. Information about interest-only loans is available on the Internet. They also contain easy-to-use interest only calculators that tell you the kind of repayments you will have to make. The current interest rates on interest only loans are also available on the Internet.