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Interest Only Loans

1 month, 3 month, 6 month, 1/1 Libor, 3/1 Libor, 5/1 Libor

What is a LIBOR or an Interest Only loan? LIBOR (London Inter-Bank Offered Rate) is the rate on dollar-denominated deposits; also know as Eurodollars, traded between banks in London. The index is quoted for one, three, and six month periods as well as for one, three, and five year periods.

LIBOR is the base interest rate paid on deposits between major banks in the Eurodollar market. A Eurodollar is a dollar deposited in a bank in a country where the currency is not the dollar. The Eurodollar market has been around for over 40 years and is a major component of the International financial market. However, London is the center of the Euro-market in terms of volume.

Wall Street Journal reports the LIBOR rates, and the LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.

Both Fannie Mae and Freddie Mac use LIBOR as an index on the loans they purchase are currently using LIBOR, and the most common quote for mortgages is the 6-month quote and the three year interest only.

Advantages

  • Basically bound to payment the minimum interest-only every month, however, any amount over interest goes towards your principle.
  • This is an excellent program to pay less interest and more towards principle.
  • Extremely low monthly payments based on extremely low interest rate.
  • Those who want to sell the house in near future must consider Interest only plan.

Disadvantages

  • If you are only paying interest then no money is contributed towards your principle.
  • It is possible that you need to refinance your loan after the fixed period is over to keep your monthly payments low.
  • If you want to keep the house for a longer period of time then it is not prudent to follow this loan program.