Interest Only Mortgages - Are They Right For You?

Interest Only Loans allow you the flexibility of investing your money where you wish, not just in your house. During the first five years of your loan you can either pay interest only, or include whatever amount of principal you wish, even a large principal prepayment if desired. After five years your loan will require monthly payments of both principal and interest.

**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.

(your loan may differ)

30-year mortgage with an interest rate that adjusts according to the following program specifics:

- 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.

Article from Los Angeles Times website

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.

Mortgages with interest-only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.

A mortgage with an interest-only payment schedule makes sense for some borrowers and is potentially risky for others. Borrowers who are counting on home-price appreciation to build equity could find themselves in a financial bind if home prices should drop and, for whatever reason, they're forced to sell.

Not all interest-only mortgages have a fixed interest rate. Some have one rate for the initial interest-only period and a higher rate—with a much larger monthly payment—for the remainder of the loan term. Others resemble adjustable-rate mortgages (ARMs). A popular variety has a fixed rate with interest-only payments for the first five years. Then it converts to a 1-year ARM. You could face serious payment shock if interest rates rose significantly during the first five years.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.

THE CLOSING: If you're planning to use a mortgage with an interest-only payment plan, and this is the only way you can qualify, make sure you'll be able to afford to keep your home when the higher monthly payments kick in.

Copyright 2004 Dian Hymer

Distributed by Inman News

Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
---|---|---|---|---|---|---|---|---|---|---|---|---|

2010 | 0.984 | 0.846 | 0.839 | 0.920 | 1.015 | 1.204 | 1.173 | 1.036 | 0.843 | 0.777 | 0.762 | 0.786 |

2009 | 2.004 | 1.975 | 2.119 | 1.972 | 1.877 | 1.600 | 1.606 | 1.498 | 1.330 | 1.264 | 1.199 | 1.018 |

2008 | 4.224 | 2.849 | 2.709 | 2.486 | 3.079 | 3.164 | 3.311 | 3.253 | 3.207 | 3.963 | 3.174 | 2.766 |

2007 | 5.441 | 5.333 | 5.201 | 5.297 | 5.389 | 5.405 | 5.426 | 5.245 | 5.275 | 4.901 | 4.638 | 4.458 |

2006 | 4.941 | 5.153 | 5.248 | 5.422 | 5.414 | 5.766 | 5.591 | 5.450 | 5.299 | 5.335 | 5.244 | 5.314 |

2005 | 3.271 | 3.511 | 3.842 | 3.710 | 3.779 | 3.863 | 4.175 | 4.312 | 4.407 | 4.677 | 4.738 | 4.823 |

2004 | 1.461 | 1.365 | 1.340 | 1.808 | 2.076 | 2.468 | 2.463 | 2.300 | 2.445 | 2.529 | 2.961 | 3.100 |

2003 | 1.477 | 1.368 | 1.340 | 1.362 | 1.221 | 1.201 | 1.279 | 1.471 | 1.286 | 1.455 | 1.487 | 1.458 |

2002 | 2.420 | 2.496 | 3.006 | 2.613 | 2.634 | 2.251 | 2.070 | 1.943 | 1.813 | 1.664 | 1.705 | 1.447 |

2001 | 5.284 | 4.925 | 4.670 | 4.330 | 4.259 | 4.055 | 3.835 | 3.600 | 2.650 | 2.311 | 2.492 | 2.445 |

2000 | 6.659 | 6.760 | 6.970 | 6.964 | 7.453 | 7.214 | 7.047 | 6.978 | 6.811 | 6.725 | 6.618 | 5.997 |

1999 | 5.108 | 5.405 | 5.307 | 5.303 | 5.303 | 5.803 | 5.836 | 6.023 | 6.053 | 6.313 | 6.261 | 6.508 |

1998 | 5.774 | 5.836 | 5.914 | 6.024 | 5.930 | 5.940 | 5.897 | 5.648 | 5.186 | 4.865 | 5.244 | 5.213 |

1997 | 5.954 | 5.954 | 6.282 | 6.454 | 6.289 | 6.141 | 5.977 | 6.079 | 6.008 | 5.922 | 6.110 | 5.669 |

1996 | 5.196 | 5.274 | 5.704 | 5.829 | 5.977 | 6.172 | 6.243 | 6.055 | 5.985 | 5.719 | 5.696 | 5.789 |

1995 | 7.250 | 6.750 | 6.750 | 6.563 | 6.055 | 5.766 | 5.875 | 5.954 | 5.969 | 5.883 | 5.672 | 5.454 |

1994 | 3.703 | 4.344 | 4.750 | 5.250 | 5.516 | 5.828 | 5.828 | 5.813 | 6.188 | 6.563 | 7.078 | 7.750 |

1993 | 3.750 | 3.578 | 3.625 | 3.563 | 3.750 | 3.781 | 3.781 | 3.563 | 3.531 | 3.688 | 3.781 | 3.813 |

1992 | 4.625 | 4.750 | 5.063 | 4.703 | 4.750 | 4.375 | 3.750 | 3.750 | 3.375 | 3.938 | 4.141 | 4.078 |

Many libor loans have "Interest Only" payments available to them and are tied to the current rate of the Libor Index.

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