Sometimes your income doesn’t allow you to afford large monthly payments in order to afford a new home. There is an option available for you to look into: an interest only mortgage loan. This home loan allows you to pay only the interest, or a combination of interest and principal, for a set amount of time. Although interest only mortgage loans may seem perfect at first glance, it is vital to learn more information about interest only loans to see if this is the right loan for you.
Introduction of Interest Only Mortgage Loans
An interest only mortgage loan can be a confusing topic if you are unfamiliar with it. This interest only loan can only be called that if the scheduled monthly payment on the mortgage only consists of interest. The borrower can opt to pay only the interest on a mortgage loan for a specified period of time before paying off the actual loan. In addition to paying the interest, the borrower has the right to pay off part of the mortgage at the same time.
There are risks involved with an interest only mortgage loan. Since the monthly payments are significantly lower during the interest only period, one may forget to budget for the upcoming raise in the payment, when the principal kicks in. It is important to keep the budget flexible when the interest only period is coming to a close to guarantee you can afford the change in monthly payments.
You can take advantage of an interest only mortgage calculator to aid in the calculation of monthly payments. Let’s say you have a fixed rate interest only mortgage for $100,000 at a 5.25% interest rate and a term for 30 years. The initial monthly payments while you pay off the interest are $479.17. Your total payments after the duration of the mortgage would be $235,724.39, leaving you with paying $135,724.39 in interest.
If you do not opt for an interest only refinance, your monthly payments would be $583.57 in interest and principal (this will be higher if you put down less than 20% of the down payment and need to pay PMI). As you can see, during the interest only period, you can save $104.40 monthly.
The Best Borrowers for an Interest Only Estate Loan
The best borrowers for this type of loan are those who have reasons for wanting this type of mortgage loan and can deal with any consequences. With an interest only estate loan, the borrower can choose one of two options: pay the interest only payment or pay the interest only payment with an additional payment to the principal. This works out best for those with a fluctuating income since they can determine how much they can afford to pay each month.
It can take discipline and dedication to make the additional payment toward the principal when it is not a requirement. As the only requirement in the first period is to pay off the interest only, the borrower may not deem it necessary to pay off part of the principal at the same time. Discipline is necessary in order to make payments and pay off portions of the principal to lessen payments in the future.
Options to an Interest Only Mortgage Loan
If the option to make a lower monthly payment each month through an interest only loan does not appeal to you or seem low enough, there are other options. One such option is the interest only ARM. An ARM, or adjustable rate mortgage, has two different interest rates.
The first interest rate is set for the interest only period, and often has lower payments than an interest only mortgage loan. The ARM then fluctuates, sometimes leaving you with a lower interest rate, and other times, with a higher interest rate. Interest only ARMs have been known to dramatically alter the monthly payments if the interest rates rise significantly.
Another option to an interest only mortgage loan is a negative amortization loan. This loan does not reduce your balance since you are not paying back the principal amount. Instead, this loan increases your loan balance over time. With this loan, you do not pay enough to cover all the interest with each monthly payment, resulting in the unpaid interest being added to the loan balance. The only reason to use a negative amortization loan is to achieve lower monthly payments, even though it dramatically increases the amount you pay overall.
Contrary to an interest only loan and negative amortization loans where the monthly payments are lower than traditional mortgage loans, a no doc mortgage loan results in a higher interest rate. A no doc mortgage is what it sounds like: a mortgage loan that does not require documents. These borrowers tend to be those who desire financial privacy, whether they only live off of investments or if they live off of crime sprees. These borrowers pay for this privacy through a higher interest rate. The less documentation provided to the lenders, the higher the interest rate is for the borrowers.
As you can see, sometimes having an interest only mortgage loan can be the best for your financial situation. For someone with a fluctuating income, this may be the best bet. Pay only the interest when financial times are harder; pay part of the principal with the interest payment when income increases that month. Whichever mortgage option you choose, always look for a lender that also has your best interests in mind and has the payments best for your budget.