Interest Only Loans

Your answer may be an interest-only mortgage loan. The way an interest-only mortgage loan works is simple. For a set period, typically, 1 month, 6 months, 1, 3, 5, 7, 10 or 15 years, you pay only the interest portion of your monthly payment. Although you are not paying on your principal during this time period, in a typical mortgage during the early years most of the payment goes towards interest anyway. This interest only option frees up for other purposes the amount that would normally go toward paying off the principal.

At the end of the interest-only period your loan reverts back to paying principal and interest and is amortized over the remaining years. For example, if you have a 5 year interest only arm, then after 5 years your loan would revert to paying principal and interest and would be amortized over the remaining 25 years at the current indexed rate.

***Interest only loans come in the forms of arms, options arm (COFI, MTA, CODI, etc), monthly arms and even FIXED 30 year loans. If you qualify, even subprime (problem credit) loans can come interest only. Please ask us about the options.

There are some real advantages to an interest only mortgage

1. Although you won't be building equity by paying off the principal, you would be able to buy a home that you want instead of settling for a home you can presently afford. Most likely you would still build equity over the years as your home increases in value.
2. You would be qualified on the interest only payment and therefore can qualify for more home on less income.
3. You could take the principal portion of your payment and use it to pay off high interest credit cards, save for your children's education, put the additional money towards a new car, or use that portion for other investments.
4. You could use the principal portion for funding your retirement plan giving you that tax advantage, and still retain the tax deductibility of a larger mortgage.
5. Most homeowners are holding their mortgages for shorter periods. Studies show that people either refinance or move every 1 to 7 years. Most people would rather buy a home that suits their lifestyle and worry about building equity through appreciation.
6. In areas where home values are high, a homebuyer could purchase a home with an interest-only loan and have the same payment that they would for a home of much less value. For example, a $500,000 30 year fixed loan at 6% would have a payment of $2997.00 per month. An interest only payment on $500,000 would be $2500 or a savings of $497.00 per month. Therefore, where a homebuyer would typically only be able to afford home worth $420,000 on a 30 year fixed mortgage, they can now purchase a $500,000 home at the same payment.
7. You can still choose to make principal payments at any time.