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.
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
|$2,447 monthly payment|
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.