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FINANCING OPTIONS...INTEREST ONLY LOANS

This page on interest-only mortgages is provided for informational purposes only.  I have never been an advocate of this loan because I just happen to be a little more conservative than most people.  Interest-only loans work for certain people, but make sure you full understand how it works and things to consider first .and should be reviewed with a reputable mortgage lender. 

With skyrocketing home prices, many home buyers - fearing they will be left out of the market - are turning to mortgages with interest-only payment schedules so they can afford to buy a more expensive home. Although these mortgages have lower monthly payments, they don't last forever, and interest-only loans aren't for everyone.  In fact, this loan type is part if the reason we're in the middle of a mortgage meltdown and credit crisis.  I encourage my clients to buy a home you can afford today because the future is never guaranteed.  Having said that, I will provide some information on interest-only mortgages.

What is an interest-only mortgage?
There are many varieties of mortgages with an interest-only payment option. Essentially, they work like this: You will make interest-only payments for the first 5, 10 or 15 years. The monthly payments are lower than they would be with a fully amortized loan during this initial period, but at the end of the interest-only payment period, you still owe the entire amount borrowed.

Unlike a fully amortized loan - where part of each monthly payment pays back a portion of the principal (the amount borrowed) - a fully amortized payment schedule pays back the loan in full during the term of the loan, which is typically 30 years. At the end of 30 years, your mortgage is paid off and the home is finally yours!

EXAMPLE:
 
$250,000 @ 6%
Interest-Only Mortgage
w/ a 5-year payment plan
vs. $250,000 @ 6%
30-Yr Fixed-Rate Mortgage
Monthly Payment = $1,250
(a $249/mo savings)
  Monthly Payment = $1,499
Payment After 5th Year    
Monthly Payment = $1,611
(a $361/mo increase)
  remains the same


The assumption is that your income will increase accordingly over the years to support the higher monthly payments.


Why choose an interest-only mortgage?
Although mortgages with interest-only payment options cost more over the 30-year term of the loan, they will save you money in the short-run, which will help you get into the home today.  Additionally, most borrowers end up paying off or refinancing their mortgages well before the end of the full 30-year loan term.

Borrowers with sporadic incomes (like the self-employed) can benefit from an interest-only payment plans - especially if the mortgage is one that allows you to pay more than the interest. In this case, you can pay interest-only during lean times and use bonuses or income spurts to pay down the principal to help build equity.

Things to consider with interest-only mortgages.

  • If you're solely relying on home-price appreciation to build equity, you could find yourself in a financial bind if home prices should suddenly drop and, for whatever reason, you are forced to sell.
     
  • Not all interest-only mortgages have a fixed interest rate. Some have one rate for the initial interest-only period and a higher rate - with a much larger monthly payment - for the remainder of the loan term.


Deciding which mortgage/loan option works best for you requires a great deal of thought.  Simply shopping for the best APR or % will most likely get you into deep financial trouble and cost thousands of dollars more than needed.  When you need help deciding which mortgage option is right for you, call me at 303-520-3179 and I will put you in touch with a local mortgage lender who will thoroughly explain the pro's and con's of each loan program and will help you make the best decision for you and your family.


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Anthony "Mike" Rael  |  REMAX Alliance - Arvada  |  5440 Ward Rd., #110  |  Arvada, Colorado 80002  |  303.520.3179
Licensed Colorado Real Estate Agent  |  Certified Negotiation Expert (CNE)  |  Seniors Real Estate Specialist (SRES)
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