30 year Fixed interest onlyThirty years Fixed interest only
Interest only vs. fixed interest rates - How do only interest loans work?
On the face of it, the IO loans look too good to be real. With an IO-Darlehen, montly payment is significantly lower than with a fixed-rate mortgages (FRM). It is important to realize, however, that at the end of the IO exercise term, the month score increases - sometimes significantly. An FRM has a fixed interest payment that is payed together with the capital over a long term.
For a better understanding of how this works, let's take a look specifically at how an IO could be compared to an FRM: if you had lent $200,000 at 6 per cent with a 30-year FRM, your overall interest and capital per month would have been $1,199.11. First, the amount paid against the capital is minimum.
In the course of our lives, interest is more quickly repaid and large portions are invested in the capital. Specifically, the first $1,199.11 $1,000 payout applies to interest and $199.11 to capital. Substantially, the amount of the credit is re-calculated each and every monthly. Now that $199.11 has been transferred to the capital, you have $199,800.89 in debt.
Thus, in the second half of the year, the amount going towards the capital is 6 per cent of the new account deficit, split by 12[source: Washington Post]. Distributed over a period of years, this periodical payment method is referred to as amortisation. By the end of the 30 years, your credit is fully repaid. IO loans of the same amount and at the same interest rates work differently.
Suppose your IO is fixed at five years with a fixed interest rat. Throughout the five years, the total amount paid per months is only $1,000, which " saves" the borrowers $199.11 per year. None of this goes to the client. Only the interest shall be subject to interest. By the end of this five-year term you still owed the initial nominal amount of $200,000, but now it is being written off over 25 years at the prevailing interest rates [source: Washington Post].
That will significantly raise your total amount paid per calendar year. To this, you should note that not all IO mortgages have a fixed interest date, and you may end up having to pay more per months earlier than you think. A few IO lending installments are set for only six month, something that many borrower miss in their zeal to get into the residential area.
The next section will examine whether a pure interest rate lending facility is suitable for you or not.