It’s a mortgage loan that is structured so that the borrower pays only the interest due for a certain amount of time; for example- three, five, seven, or 10 years. After the interest-only period has expired, the loan is renegotiated at the current interest rate for the remaining life of the loan. For example, if the loan were set up as a seven-year interest-only loan, the borrower would pay only interest for the first seven years. At that time the principal would be amortized over the remaining 23 years of the 30-year loan at current interest rates.
After the fixed period of interest only payment, usually 5 or 10 years, the loan will be recasted into either 25 year or 20 year loan. The borrower needs to be careful and plan for the payment shock once the loan is recasted.
Interest Only mortgages allow a home buyer to qualify for a bigger home with his current income. This interest only feature is useful for those who expect to have an increase in salaries and those who have other uses for their income.
Borrowers may want to look at the side by side comparison of an interest only loan compared to a regular Principal and interest payment loan and make a plan as to what they can do to productively make use of the difference such as investing or paying down higher interest debt.
Borrowers should always keep in mind that the interest only payment feature is an option. The borrower always is able to make payments towards principal reduction (within the parameters of any pre payment penalty restrictions) if they choose to do so. This is why an interest only feature is attractive to borrowers with fluctuating monthly income or who are self employed.
Interest only loans are great for self-employed and commissioned borrowers. Interest only loans provide more flexibility in making your monthly mortgage payments. For self-employed and commissioned borrowers this gives them the ability to pay more than the interest only payment when they have good months, and to pay the minimum interest only payment during slower months.
During the interest only period you are paying nothing toward the principal of your loan. Therefore, your equity will grow more slowly. If home values are appreciating slowly in your area, it may be several years before your home will sell for enough to pay off your mortgage plus realtor fees and closing costs.
An interest only loan can increase the purchasing power for people can not find anything in their price range that they would even consider living in.
Interest only loan can provide extra cash flow for your living needs if you are retired or living on a fixed income.
If you are retired or living on a fixed income an interest only loan can provide extra cash flow for your living needs.
Interest only loans initially pay only the interest due until they are recast. When they are recast they are fully amortized at the current interest rate. At the recast period it may be beneficial to refinance to achieve a lower payment.
Interest Only loans are a compelling and attractive option for first time home buyers and borrowers whose incomes are increasing quickly every year.
One look at an amortization table from your lender is often all the reason a borrower needs to go the interest only route for 1 to 5 years, as in a classic principal & interest mortgage only a very small amount of principal is paid off in the same time period, and the money saved by the interest only borrower each month often can be much more useful in the borrower's pocket instead of the bank's.
