Cobalt Financial Corporation - San Jose, CA - Cobalt Financial Corporation

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Interest Only Loan Risk Explained

The truth about interest only loans – and negative amortization.
There is a common misperception that all interest only loans have a feature called negative amortization. Wrong answer, most interest-only loan programs that are available with short term fixed rates DO NOT have negative amortization.

How do you measure your personal risk level?
Many factors go in to determining if an interest only loan is right for you. It is imperative that you understand the following points before deciding on an interest only loan:

If you are on a fixed income and are relatively certain that it may not rise in the future, then interest only loans may bear a greater risk for you. We will review your needs and goals. This is a good time to check with us.

Shorter fixed rate terms and then adjustable loans for the remaining portion of 30 years. Examples: 3 year fixed – then adjustable loan, 5 year fixed – then adjustable loan, 7 year fixed, etc. – then adjustable loan. After the fixed (interest only) term of the loan has ended you will begin to pay "principal and interest" payments. The possibility of payment shock is distinct possibility for those consumers who hold on to these loans past the interest only period. Here's what happens: the loan has a 30 year term, after the interest only period, you now have the remaining years to fully amortize the loan balance. Remember, the payment shock is very real for those consumers who have paid nothing towards principal in the interest only period.

The more principal you pay down during your interest-only period the less shock your new payments will be but it doesn't mean payment shock will not exist since many factors go into determining your payments when the time comes including then current interest rates, and there is always the possibility that rates will be lower at the end of the interest only period. The best thing to do is to check with one of our experts, we'll help you decide what is best for you!

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