Interest Only Mortgages - Information and Advice

"Use interest-only mortgages and grow equity by appreciation."

Interest only mortgages are another option in the home finance menu

Offering interest only mortgages with low payments pays off for lenders. We'll explain how and why to use this adjustable rate mortgage or stay with the standard fixed rate home financing. To get an idea of costs and payments, check out the E-Loan Center for current rates on interest-only mortgages.

Interest only mortgages may or may not be right for you

Interest only mortgages are pretty self explanatory per their name. You make only interest mortgage payments on the loan for a fixed period of time. There is no reduction in principal.

After that period, there may be a balloon payment which means the entire balance comes due and payable all at once. Or, the loan may switch to a fully amortizing mode meaning the payments will increase to an amount that will pay it off over the remaining term of the loan.

Rates on interest only mortgage loans are usually higher than fully amortizing rates on both ARM and Fixed programs. Higher by usually an average of .25% due to the higher risk factor to the lenders. Interest only payments don't build equity which lowers the lenders level of exposure.
 

Interest only mortgages with adjustable rate example

An interest only mortgage loan of $150,000 on an adjustable rate program that offers a fixed interest rate of 5% for the first 5 years will have interest only payments of $625 per month for the full 5 years.

The fully amortizing payment at the same rate and term would be $805.23.

After the 5th year, the loan is amortized at the fully indexed rate ( index + margin ) until the loan is paid off.

Rate caps will protect the borrower from huge increases that could otherwise be crippling.
 

Are interest only mortgage loans on an adjustable rate plan safe?

Yes. Adjustable rate loans got a bad reputation when they first came out. In the beginning they had no rate or payment CAPS. Rate and payment caps protect you from large payment increases but your payment could actually go down if rates are lower at adjustment time.

The LIFE CAP of the ARM loan is the limit of rate increases over the entire life of the loan. These caps allow you to figure out the worst cast scenario on rate and payment increases.

If you can handle that, you're in good shape. If you can't handle the worst case over the time you expect to keep the loan, give ARM financing a second thought.

Fixed rate interest only mortgage loan

On Fixed Rate interest only loan programs, the interest only payments are made for on average the first ten years of the loan. After that, the remaining balance is amortized over the last twenty years.

Here's the math:

$150,000 loan at 5%
Interest only payment = $625 per month. for 10 years.

After 10 years:
$150,000 bal. at 5% amortized for 20 years = $989.93 per month.

These are not for everyone. Carefully consider your goals and financial plans before committing to any home loan program. You are the one who has to live with it after it closes.

We are happy to counsel our clients and prospective clients on what loan program might be best for their specific need. It's what we do best.

Visit the E-Loan website to explore all types of Mortgage Loans

 

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