loan type: Interest-Only Mortgages
about interest loans
Interest-only payments on your mortgage loan for the first five or seven years of your 30-yr amortized loan. Allows for lower payments.
With interest-only mortgage loans, your monthly payment is the interest rate charges for the mortgage loan only. No principal payments are being made.
Interest-Only Fixed Rate Loans
Interest-only mortgage loans are gaining popularity,
Especially among first-time homeowners and existing homeowners looking to buy a higher-priced home.
With interest-only mortgage loans, your monthly payment is the interest rate charges for the mortgage loan only. No principal payment is being made.
Your total monthly payment can be substantially lower than conventional amortized mortgages that include both principal and interest in your monthly payment.
How Interest-Rate Loans Work:
Interest-rate loans may vary by lender. They are available in adjustable and fixed rate terms. But generally, lenders will lend you money under a 30-yr fixed-rate term.
You will pay interest-only on the loan for the first 5- to- 7 years. After the interest-only period, you will have the option to pay off your mortgage by refinancing or begin principal and interest payments amortized for the remaining term (the 30-year mortgage would now fully amortize over 25 or less years).
Allow us to use this cost comparison table to illustrate:
30-Year Terms Amortized Interest-Only Mortgage Loan Amount: $100,000 $100,000 Interest Rate (APR): 6.00% 6.00% Monthly Payment: $599.95 $500.00 Amount of the Mortgage Loan to be Re-Paid after 5 years: $93,054 $100,000 New Monthly Payment: Same $644.30 Interest Paid After 30 Yrs: $115,838.19 $123,290.24
run your own numbers to compare
Who can benefit from Interest-only loans:
The advantage of interest-only loans is that you begin with a smaller payment during the first 5-7 years of the mortgage. Smaller payments can qualify you for a bigger home.
Since many homeowners expect to move or refinance their homes within the same period, these homeowners with interest-only loans will simply move out of the loan obligation by taking on a new mortgage at a time that their expected salary will be higher.
Interest-only loans also benefit applicants whose income is mostly in the form of commissions and bonuses. Interest-only loans allow them to afford a higher-priced home on their current salary. And when their bonus or commission money is paid, they can take the proceeds and pay down the mortgage.
Why consider interest-only mortgage loans
- allows you to afford a bigger home
- allows you to get into your first home with lower payments
- allows you to reduce your housing ratio
- allows you to invest monthly savings into better returns
- allows renters to effectively "lease their home" for tax benefits
- allows you to maximize your cash flow
Disadvantages of interest-only loans
- you are not building equity
- if markets decline, you may lose money
- allows consumers to carry too much debt
- higher payments or refinancing at end of the interest-only term my negatively impact cash flow
- consumer runs the risk of not being able to meet debt obligations if personal economics fail to materialize
Run your numbers to compare cost:
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download amortization worksheet:
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