SoMaHomeSearch.com

I just finished reading in article in today’s Chronicle titled, “Home sales fall as prices settle”. At the very end of the article the reporter asks a would-be home buyer if the mild uptick in interest rates had frightened her away from home buying: “the mild uptick in interest rates hadn’t frightened her out of the market and that they were hopeful of finding a fixer-upper they could afford. But she intends to steer clear of nontraditional loans, such as those that allow buyers to put off paying principal for a period.”

“I do not like these interest-only things,” Vercher said. “I don’t want to live on the edge that much.”

There is a huge misconception by the general public about interest only loans. These loans can afford you a little extra breathing room when money is tight. But the idea behind an interest only loan is not to make that “minimum payment” every month. You should, at every chance you get, add “principal money” to that payment.

Think of it this way. When your credit card bill comes in and the balance is say $5,000, with a minimum payment of $80. Do you make that minimum payment? Well, if it’s a month where you have extra bills, and can’t afford to pay more than the minimum, then you do. But in a normal month, when that credit card bill comes in you should “always” pay more than the minimum or one of two things will happen. You either go broke or you need to change your spending habits.

It’s exactly the same way with your interest only loan. When your mortgage broker or bank tells you that your payment is only $3,000 a month, you “must” include additional “principal payments” into your budget. Your mortgage broker or banker would be happy to help you determine what a worthwhile principal payment might be.