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General questions about interest only loans

Posted by drcindy (My Page) on
Sat, Feb 27, 10 at 23:35

Hi all,

A couple of years ago, my in-laws obtained a HELOC for $150K to remodel their house. My MIL told me recently it's an interest-only loan with an APR of only 2.5%. Thankfully, she's been making principle payments on top of that. However, the way she speaks of it makes me think she may not know of other potential pitfalls to these kinds of loans. Doesn't the APR increase dramatically after a few years, to include some sort of balloon payment? I don't want them to have a big unpleasant surprise in the near future. Thanks!

Follow-Up Postings:

RE: General questions about interest only loans

Your inlaws should read all the terms of their HELOC. Yes, their interest may go up dramatically or the lender may call the loan due and payable.
We (on this forum) don't know ther terms without reading the fine print. If they appear to not understand all the terms, read the docs for them telling them the pitfalls.
HELOC are different than other home loans.

RE: General questions about interest only loans

What cmarlin said. HELOCS are generally floating rate instruments, tied to Prime or some other standardized rate. If she is at a fixed rate now, my bet is that the line is at the fixed rate for a certain number of months/years, but at some point it will revert to a Prime Plus floating rate product.

Get your MIL to read the contract, or read it with her, to understand the terms.

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