Your Interest Only Loan Rate: Prevent Fluctuation

An interest-only loan is structured differently from a traditional loan. With a traditional loan, the lender calculates the total interest your loan would collect over the life of your loan, and adds a portion of that balance to each of your monthly payments. With an interest-only loan, however, the lender still calculates how much interest your loan would collect - and for the first few years of your loan, your payments go to pay off only the interest. Then when the interest is paid off, your payments are amortized, or in other words, are applied to the actual loan.

The problem with this plan is that the longer you wait before your loan is amortized, the less time you have to pay off the principal of your loan - and that means that your monthly payments may have to be raised a great deal in order to ensure your loan is paid off in time.

The safest way to prevent a sharp fluctuation in your interest only loan rate payments is to sign up for the shortest amount of time possible for interest-only payments. Most interest-only loans offer you a time period of a few years before your loan amortizes - three years, five, or even ten. Your monthly payments will rise once your loan amortizes no matter what you do. But if your loan amortizes after only three years as opposed to ten, that gives you seven more years to make payments towards the principal of your loan - which also means the payments will not have to be raised as high.

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