Interest Only loans

January 27th, 2014

An “Interest Only” Mortgage loan is a very popular alternative to traditional fixed rates. Gaining popularity at record speed, these home loans allow a consumer to make “Interest Only” payments (you do not pay down principal) during a defined period of time for the loan. These programs can offer consumers greater purchasing power, increased cash flow and a number of other benefits. For example, one of the most common programs a is a 5 year interest only loan where the borrower has a fixed rate for five years and is only obligated to pay the interest owed every month. This could mean hundreds of dollars in monthly savings, increased purchasing power and many other benefits.

These loans are not for everybody, however. If you are self disciplined, have a good understanding of the time frame you will be in your home, and understand the potential risks, then these products may provide an extremely attractive option to many homeowners.

GREATER PURCHASING POWER

A large number of homebuyers expect to see income rise over the next few years. With many “Interest Only” home loan programs you can benefit from lower qualifying payments enabling you to buy more home while still maintaining the security of a fixed rate for a defined period of time.

PAYMENT FLEXIBILITY

Most lenders do not impose restrictions or penalties should you wish to start paying down the principal loan balance at times convenient to you.

REDUCED QUALIFYING INCOME

Much like the “greater purchasing power” advantage this feature will allow many home buyers to qualify for a bigger home without having to prove a “bigger salary”. Most lenders state that if your initial interest rate is fixed for a period of three (3) or more years than the borrower can qualify on the “interest only” payment.

Interest-Only Loan vs. 30-Year Fixed Loan 5-Year Savings
Example 1: $500,000 loan
Loan Type Monthly Payments
30-Year Fixed Loan & 6.00% $2,997 Principal & Interest payment
5-Year Interest-Only ARM

& 5.875%

$2,447 monthly payment
Monthly Savings: $550
5-Year Savings: $33,000

Here’s how it works:

Take advantage of this innovative approach to home financing and realize the double benefits of more affordable payments plus improved cash flow. You can make the minimum interest-only payment in order to maximize your available cash for other uses. Or you are free to pay down any portion of the principal you wish—it’s your decision. Either way, your principal balance will NEVER increase.

Note: This is not a negative amortization product, your principal balance will never increase!

Why Pay Principal?

For the first 10 years of a fixed rate mortgage you are paying almost 85% in interest to the bank so the amount of principal actually paid down by a borrower is somewhat minimal.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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Interest Only Loans

October 18th, 2011

Anyone that reads my blog knows that in general I am not a fan of Interest Only (IO) loans. I have said before that an IO loan is like putting your mortgage on a credit card. But on a refinance it may make sense if you have already built a lot of equity, are more interested in savings than equity building, and know you are not going to live in the property forever so have no interest in getting the mortgage paid off.
I had a client tell me recently (more…)

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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