Interest Only Mortgage

  • By Admin
  • August 28, 2014
  • Comments Off on Interest Only Mortgage

Interest-Only Loans are a relatively new loan program.  Before the 2007 financial meltdown, it was favored by property buyers looking for the lowest monthly installments, because interest-only mortgages, as the name implies, requires the mortgagor to repay only the interest for the month.  No repayment of the principal is required.

It should be noted that since interest-only loans do not require the periodic repayment of principal.  The borrowers can potentially be required to repay in one lump sum when the loan matures.  Borrowers often expect to refinance the interest-only mortgages before they become due.

The balance of the mortgage that you take out on an interest only loan will always remain the same if you pay the interest only payment. A $150,000 loan that is an interest only loan and only the interest payment is made for 5 years will still have a $150,000 balance.

Homeowners have the option of paying more than “interest-only.”  Any payment in excess of the required “interest only” amount goes towards paying down the principal.

Interest-only loans are also commonly utilized by home buyers to purchase a home, before his existing home is sold, with the intention of paying off the entire interest-only loan with the  proceeds from selling the current house.  For families who need to sell the current home and purchase another within a short period of time, interest-only mortgages can be a savior.

The interest-only option can also be useful when you are consolidating credit card debt and need to keep your monthly payments to a minimum. In months when you have extra cash, make an additional payment toward principal. As you retire debt, make that extra principal payment a monthly habit!

Generally the interest rate on an interest only loan is slightly higher than that of a loan that includes interest and principal.

The interest only payment can also help a buyer get into a slightly more expensive house then he could otherwise afford with a standard principal and interest payment.  Since required repayment is only the interest owed, a mortgagor can qualify for a bigger loan given the same income amount.

Interest Only mortgages require payments of only the interest amount incurred in the initial few years. The most common Interest Only mortgage has a 10-year interest only feature, in which the mortgagor only needs to pay the interest accrued every month. For example, with the $200,000 loan at 6.5% fixed interest rate, the mortgagor only needs to pay $1,083 per month ($200,000 X 6.5%, divided by 12 months). After the 10-year interest only period, the loan is amortized to be paid off in the remaining 20 years.

As with any financial tools, interest only mortgages can be helpful when used properly, but can also have devastating consequences for homeowners who abuse it.

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