Need a flexible mortgage with interest only choice?
With this type of mortgage loan, the borrower is approved for and gets a 30-year mortgage, electing to pay interest only for a set period of time, such as 3, 5, 7 or 10 years. After the end of the interest only period, the monthly payments re-adjust to include the principal, and the loan is re-amortized for the remaining years which can cause the payment to rise substantially.
At this point, most people either refinance, start paying off the principal, or sell their property. Studies have shown that homes are sold on average every 7 years. So, if you plan to sell within that period, why pay the principal when the first 10 years of a mortgage payment are mostly towards interest?
An Interest Only Mortgage may be a good fit if:
This flexible mortgage gives borrowers the tools necessary to manage their debts as carefully as they manage their assets. Most Americans assume it's always best to pay down their mortgages as quickly as they can. But in a lot of cases that's not always true.
Advantages of Interest Only Mortgage Loan Payments
The advantage of an interest-only loan is that it allows a borrower to free up capital to invest in assets that yield the highest return or serve some particular financial-planning purpose, rather than locking it up in a house. For example, you could take the money you'd be paying in principal each month and:
In the above scenarios, you won't have paid down your mortgage at all, but your financial picture outside your mortgage will be much more robust. Surely, there are plenty of pitfalls in not paying down your principal. For one thing, you'll be building up less equity in your home. On the other hand the amount of equity you build by paying a full payment is very minimal for the first 10 years of a 30 year fixed rate mortgage as you are paying almost 85% in interest to the bank.
You have to also consider that you most likely will be accumulating equity as the property appreciates in value over the interest only period. But if you think you live in a market where prices aren't likely to rise much, or might fall, you might want to use the option to pay down some of the principal to give yourself an extra cushion of equity.
In summary, an interest-only loan can save you thousands of dollars and possibly earn you thousands more with the right diversified investments over time.
The payments on an interest only mortgage loan are very easy to calculate. Since the borrower is not paying any principal and there is no amortization you can use simple math to calculate your monthly loan payment on your smartphone.
Example:
Location: Southern California
Single Family Home:
Purchase Price: $1,200,000
Loan Amount: $1,080,000
Product: 5 or 10 Year Fixed ARM Interest Only Mortgage
Rate: 5.250%
Step 1: Calculate Total Annual Interest
Your total annual interest would be $1,080,000 (Loan Amount) X .0525 (Interest rate in Decimals)Step 2: Calculate Total Monthly Interest
Divide the annual interest by 12 (number of months in a year) to determine your monthly payment. $56,700 (Annual Interest) divided by 12 (number of months)Interest Only Payment of $4,725 - you Save $1,239 per month
*when compared to a principal & interest payment of $5,964
Your new loan will give you:
Interest Only Loans are available on 5 years fixed, 7 years fixed, 10 years fixed, and sometimes on a 30 year fixed program. After the interest only fixed period for the initial 5 yto 10 year period, the loan converts to a fully indexed rate with principal and interest due. Depending on your loan amount, some programs have as little as 5% down to $1MM or 20% down up to $2MM. After the interest only period, the loan converts to full amortization payment for the remaining term.
Certain risks are associated with any kind of adjustable rate mortgage. The information contained in this site should be used only for reference. Before entering into an agreement with any financial institution please consult with your financial planner, accountant or any other person you regads as a financial expert and is familiar with your financial profile. For more information on the terms and conditions of this website and the use of information contained please visit our legal section below.