What is an interest-only loan?

Interest-Only Mortgages Explained

Many people enter into the mortgage process and are unfamiliar with the products that are available in the marketplace. Some borrowers are sophisticated and have been through the mortgage process before. Whichever category you fall into, it is worth understanding an Interest-Only ("IO") mortgage when you are looking at all the options.

Interest-Only loans are attractive to buyers wanting to save money on their monthly payments.

What Is An Interest-Only Loan?

An Interest-Only Loan is a loan where you pay only the interest portion of the loan at the beginning and the principal at the end. The interest payments last several years at the first portion of the loan term (usually the first 10 years).

What Is Re-Amortization?

Re-amortizing your loan means that you can adjust the terms of your loan to change the loan payment amount or to shorten or lengthen the loan term. In short, the loan payment is recalculated.

In the case of Interest Only mortgages, when the interest portion of the loan finishes up, the payment is recalculated and the remaining payments include the interest and the principal.

Does An Interest-Only Loan Make Sense For You?

Home Loans are a personal decision, and they come down to a financial choice. Home-Buying is an excellent opportunity to sit down and get very realistic about your present and future financial picture. Some important questions to ask yourself are:

1) How long do you plan on living in the home you are buying?

2) What can you afford to place as a down payment?

3) What can you afford to pay monthly? Will this change in the next few years as your wages / salary change?

4) Realistically, how do you think the economy will change in the next 5, 10, 15 years, and will those changes have an effect on your income?

Once you start to get honest with yourself about the reasonable answers to these questions, you will have a much better idea of which mortgage product fits your needs.

Home buyers who think that their income will increase over the next several years may be a great fit for an Interest-Only loan as they can benefit from the initial years of low payments.

An Interest-Only mortgage can be a good fit for a home buyer who plans to be in the home for less than the Interest-Only portion of the loan (usually 10 years or less). A borrower in this scenario can reap the benefits of a low monthly payment, and sell the home before the loan is recalculated (re-amortized), before the higher monthly payments begin.

Depending on the loan amount, an Interest-Only mortgage can realistically save you thousands of dollars in monthly payments per year during the IO portion of the loan.

A borrower with an Interest-Only loan, can use their savings from their low monthly payment to invest in other assets that can generate revenue at a favorable rate of return: stocks, bonds, and any other investment you think will have strong returns.

You could also use the extra savings to pay off credit card debt, student loans, and any debt with a high interest rate.

Keep in mind, you DO have the option to make payments toward the principal. So you are not limited to just making the Interest-Only payments.

What Are The Disadvantages of Interest-Only Loans

The most obvious difference with an IO loan is the recalculated (re-amortized) payment structure at the end of the Interest-Only term. This can be a hindrance for several reasons, the most significant being the new payment structure for principal and interest combined can be startling.

Another option if your goal is to achieve a low monthly payment is an ARM (Adjustable Rate Mortgage).

If you have questions about Interest-Only Home Loans call us at:

(888) 627-7708 extension 103 .

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