Interest
Only Mortgages
A mortgage is
called “Interest Only” when its monthly
payment does not include the repayment of
principal for a certain period of time.
Interest Only loans are offered on fixed rate
or adjustable rate mortgages as wells as on
option ARMs.
At the end of the interest only
period, the loan becomes fully amortized, thus
resulting in greatly increased monthly
payments. The new payment will be larger than
it would have been if it had been fully
amortizing from the beginning. The longer the
interest only period, the larger the new
payment will be when the interest only period
ends.
You won't
build equity during the interestonly term,
but it could help you close on the home you
want instead of settling for the home you can
afford.
Since you'll
be qualified based on the interestonly
payment and will likely refinance before the
interestonly term expires anyway, it could be
a way to effectively lease your dream home now
and invest the principal portion of your
payment elsewhere while realizing the tax
advantages and appreciation that accompany
homeownership.
As an
example, if borrow $250,000 at 6 percent,
using a 30year fixedrate mortgage, your
monthly payment would be $1,499. On the other
hand, if you borrowed $250,000 at 6 percent,
using a 30year mortgage with a 5year
interest only payment plan, your monthly
payment initially would be $1,250. This saves
you $249 per month or $2,987 a year.
However,
when you reach year six, your monthly payments
will jump to $1,611, or $361 more per month.
Hopefully, your income will have jumped
accordingly to support the higher payments or
you have refinanced your loan by that time.
Mortgages
with interest only payment options may save
you money in the shortrun, but they actually
cost more over the 30year term of the loan.
However, most borrowers repay their mortgages
well before the end of the full 30year loan
term.
Borrowers
with sporadic incomes can benefit from
interestonly mortgages. This is particularly
the case if the mortgage is one that permits
the borrower to pay more than interestonly.
In this case, the borrower can pay
interestonly during lean times and use
bonuses or income spurts to pay down the
principal.
