Current Interest Only Mortgage Rates

Interest Only - Jumbo 5/1 ARM

The reduction in minimum payment is dramatic.

Example:
Loan Amount: $333,700
Interest Rate: 4.500% (for example use only, not a rate quote)
Minimum monthly payments:
Interest (4.50%) Only = $1,251
Principal and Interest (4.50%) Mortgage = $1,691
Reduced monthly payment via Interest Only Mortgage= $440

Comparing this minimum payment of $1,251 against the higher rates that many homeowners currently have and the savings is even more pronounced:

Same scenario as above but current rate on existing Principal and Interest loan is 5.875%:
Monthly payment is $1,973.96.
Reduced monthly payment via Interest Only Mortgage = $723

Please be fully aware that with the Interest Only mortgages if you pay the minimum required amount (interest only) during the first five years your principal balance will not start reducing until year six when principal and interest payments start.

Common Interest Only Loan Details

• The borrower pays interest only during the inital fixed period term (5 years). The unpaid balance is then fully amortized over the remaining term of the loan as an adjustable rate mortgage.
• The borrower may make voluntary principal payments during the interest only period. The required interest only payment will be reduced to reflect the decrease in the principal upaid balance.
• The borrower is qualified using the full P & I for the loan (even though the borrower's payments will be for interest only).
• Index is based on the average of Interbank Offered Rates for 1 year U.S. dollar-denominated deposits in the London Market (LIBOR), as published in the Wall Street Journal. The index rate used to calculate changes to the interest rate is the value available as of the first business day of the month prior to the date of adjustment.
• Starting with the first interest rate adjustment on your loan, the Interest Rate will be based on the Index plus the Margin, rounded to the nearest one-eighth on one percentage point.
• Margin: 2.250 to 3.000
• The interest rate cannot increase or decrease by more than 5 percentage points at the First Rate Change Date, and will not increase or decrease by more than 2.00 percentage points at any subsequent Rate Change Date.
• Over the term of the loan, the Interest Rate cannot increase by more than 5.00 percentage points above the Initial Interest Rate or decrease to less than the Margin on your loan.
• Conversion Option is available on some Interest Only programs.

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Home Buyers Turning to Interest-Only Loans

Are interest-only mortgages a good deal?
By: Dian Hymer April 19, 2004

Many home buyers are turning to mortgages with interest-only payment schedules so they can afford to buy a more expensive home. These mortgages have lower monthly payments, which makes qualifying easier. But the lower payments don’t last forever, and interest-only loans aren’t for everyone.

Mortgages with an interest-only payment feature come in many varieties. Basically, they work like this. The borrower pays interest-only payments for the first five, 10 or 15 years. The monthly payments are lower than they would be with a fully amortized loan during this initial period. However, at the end of the interest-only payment period, the borrower still owes the entire amount borrowed.

With a fully amortized loan, part of each monthly payment pays back a portion of the principal (the amount borrowed). A fully amortized payment schedule pays back the loan in full during the term of the loan, which is usually 30 years. At the end of 30 years, you owe nothing.

Interest-only is a bit of a misnomer. You ultimately have to repay the amount you borrow, so you won’t make interest-only payments indefinitely. After the initial interest-only period, the principal is amortized over the remaining loan term. With a 30-year mortgage that has a 5-year interest-only payment plan, the principal will be amortized over the remaining 25 years of the loan. A shorter amortization period requires the borrower to make a higher monthly payment in order to repay the loan more quickly. This means an increase in the monthly payment starting with year six of the loan.

For example, if you were to borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year 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.

Current Interest Only Mortgage Rates

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