Fixed Rate Mortgage versus an Interest only Mortga - With a fixed rate mortgage (FRM), your monthly payments will be steadyInterest only loans are available with both fixed rates and adjustable rate mortgages. Paying the interest only allows borrowers to lower their monthly mortgage payment.
With an Interest Only loan, you make no payments to principle. They only way to gain equity is to make additional higher payments or choose a home in a high appreciation area.
In contrast, with an adjustable rate mortgage (ARM) , your payments will vary over time.
The average homeowner in America sells or refinances roughly every 5 years. Keeping this in mind, it may not always be in your best interest to go with a fixed rate mortgage for 30 years. An ARM loan may be more appropriate for you, especially if you know you plan on moving or refinancing within the first few years. A 5/1 ARM will generally provide a lower interest rate than a 30 year fixed rate mortgage will and the lower rate will equate to a lower mortgage payment. So think about not just the now when obtaining a mortgage but the near future as well.
Adjustable rate mortgages typically have an initial fixed rate lower than the rate of a comparable fixed rate mortgage. The initial fixed rate period is followed by adjustment intervals. For example, a "3/1 ARM" is fixed at an initial low rate for the first 3 years, and then adjusts every year based on an index. Common ARMs are: 1/1, 3/1, 5/1, 7/1, and 10/1. (Don't confuse ARMs and balloons )
Interest Only is an option that can be chosen for most types of mortgages, Fixed or ARMs. The interest only option allows the borrower to make only interest payments. This is usually only allowed for the first 5-10 yrs. Choosing an interest only option can also affect your interest rate. There is usually an add on of 0.25% - 0.5% to the interest rate for interest only payments.
30 Yr. Interest Only Loan - The 30 Year Interest Only Loan is an exciting, yet relatively new loan program, that can be used to plan your investment choices and realestate options. One Great way this loan can be used, is to purchase a new home, when you may still be waiting to sell your previous home. When your previous home sells, you can transfer the proceeds to pay down the principal balance on your new Interest Only Loan, and your mortgage payment will decrease accordingly!
Interest only loans are great for real estate investors. They help real estate investors maximize their cash flow. Interest only loans are also very good for people in professions that know within a certain amount of time they are going be making a considerably higher income (such as a doctor, becoming a partner at a firm, knowing you are going to be accepting a higher position within a certain time, etc...)Interest only loans also can help homeowners to maximize their own cash flow in order to invest money into retirement accounts, pay off high rate debt, start a savings account, etc...
The interest-only option can also be useful when you are consolidating credit card debt and need to keep your monthly payments to a minimum. In months when you have extra cash, make an additional payment toward principal. As you retire debt, make that extra principal payment a monthly habit!
You will continue to have the option of paying more than "interest-only." However it is a good option to have in order to have a lower required payment when needed.
Generally the interest rate on an interest only loan is slightly higher than that of a loan that includes interest and principal.
Interest Only mortgages require payments of only the interest amount incurred in the initial few years. The most common Interest Only mortgage has a 10-year interest only feature, in which the mortgagor only needs to pay the interest accrued every month. For example, with the $200,000 loan at 6.5% fixed interest rate, the mortgagor only needs to pay $1,083 per month ($200,000 X 6.5%, divided by 12 months). After the 10-year interest only period, the loan is amortized to be paid off in the remaining 20 years.
Because the loan is re amortized to a 20 year note your payment will jump significantly compared to the 30 year amortized interest only loan.
A fixed rate interest only loan allows you to have a low interest rate and pay a low payment. Usually homeowners understand they will need to refinance in the future. This is because there interest rate will increase after the fixed period and they have had no principle reduction.
The interest only payment may also let you afford a slightly more exspensive house then you could afford with a standard principal and interest payment. Ask your mortgage broker for information on interest only programs and there benifits.
The balance of the mortgage that you take out on an interest only loan will always remain the same if you pay the interest only payment. A $150,000 loan that is an interest only loan and only the interest payment is made for 5 years will still have a $150,000 balance.
