An Interest only mortgage can be an excellent choice for some borrowers. They are designed to offer the lowest payment possible as you are not paying anything toward the principal in your normal monthly payment.Of course, you may make additional payments toward your principal balance at any time.
The interest only product was originally designed for individuals whose income is cyclical. For example, an individual who is a sales executive with a relatively low base salary but commission or bonus payouts quarterly would benefit from an interest only mortgage. You would have the lowest possible payment during months when no bonus is paid and you would be able to make contributions to the principal balance when the quarterly bonus is paid. However, I am seeing individuals in many situations choosing this option as a method of lowering their payment, sometimes significantly.The benefit is this allows you to pay additional principle at anytime and your payments will automatically recalculate. For example, you buy a new home prior to selling your old home. Once you settle on your old house you take the proceeds and pay down your loan on the new mortgage. The new mortgage will now readjust your payments
Generally, interest only mortgages are available for a 30 year term, with the first 5 or 10 years interest only (depending on the lender selected) and the final 20 to 25 years fully amortizing . Some lenders who offer an interest only mortgage require a prepayment penalty for the first 1-3 years and have caps on the amount your rate can change at any time and over the life of the loan. I always try very hard to avoid prepayment penalties on these and other types of loans and can usually work around the requirement. Another useful feature of some interest only mortgages is that if you choose to make a principal payment during the interest only period, your balance is reduced the following month lowering your payment further.
Again, an interest only mortgage is not the right choice for everyone, but it can be a very effective choice for some individuals. Please give me a call or send an email and I will be happy to discuss this alternative with you.
An example of how powerful this tool can be:
- On a $250,000 mortgage at 6.000% for 30 years-
- Principal and Interest payment= $1498.88
- Interest Only mortgage payment at 6%= $1250.00
- Total Monthly savings= $248.88
If you want to make the comparison for your own specific situation, calculators to find the amortizing payment are available on this website. The math to find the simple interest payment is, Loan Amount x Interest Rate / 12.
Of all of the interest only programs available, the Cash Flow ARM offers the greatest flexibility by far.
ARM vs Fixed Rate Mortgage
A fixed rate mortgage has the same payment for the entire term of the loan. An adjustable rate mortgage (ARM) has a rate that can change, causing your monthly payment to increase or decrease. Use this calculator to compare a fixed rate mortgage to two types of ARMs, a Fully Amortizing ARM and an Interest Only ARM.
Click Here to Calculate Your Simple Interest Payment
Information and interactive calculators are made available to you as self-help tools for your independent use. We cannot and do not guarantee their accuracy or their applicability to your circumstances. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
