An Interest only mortgage can be a good choice for some borrowers. They are not the right choice for everyone. You can buy more house for the money with an interest-only-mortgage, because of the lower payment. If you are interested in an interest only loan or mortgage product, make sure you know how you will pay off the mortgage before you accept it. We will cover this later. Having a good idea behind mortgages is a great place to start. There are many online resources that you should use to your advantage.
The math to find interest is: Loan amount x interest rate /12. For example, $100,000 x .06 = $6000 / 12 = $500.00 per month. As you can see paying $500.00 per month for a $100.000 home has a very low payment.
The interest only mortgage was designed for people whose income fluctuates. For examples, a sales person with a low salary and paid a bonus 2 or 3 times a year, would really benefit from this interest only loan. This person would have a low payment when there was no bonus. In turn, when the bonus was paid, the person would be able to pay on the principal.
There are several options of interest only mortgages. Some of the popular options are: 1 year, 3 years, or 5 year plans and these can either be a fixed rate or an adjustable rate mortgage. You can talk with a Loan Officer to see what they offer.
LIBOR RATE
Many lenders that offer interest only mortgages are now basing them on the LIBOR Index. LIBOR is an abbreviation for: "London Interbank Offered Rate". It is the interest rate offered by a particular group of London banks for US dollar deposits of a stated maturity.It is usually more stable rate than the Treasury rate.
Who Uses Interest Only Mortgages?
1. People who want to invest their money in the stock market and not tie up that money in a house. They like to take risk. Many people make a lot of money this way.
2. Some people are more concerned with low payments than having equity in their property. They know they will live in this home for a short period of time before they will sell.
3. The professionals that are graduating from college are concerned with buying a lot of house for the money now, knowing that in the future they will be able to pay more. These are typically attorneys and doctors.
4. Real Estate investors like interest only mortgages because they pay low payment now with no negative cash flow. The tenants pay the whole interest payment for the investor. And when the property appreciates enough, the investor sells and pays off the mortgage.
Advantages of Interest Only Loans
* You will have Greater Purchasing Power.
* You will be able to afford more house for the money.
* You should have payment flexibility. When you have extra money is the time to pay down the principal loan balance. Most lenders do not have prepayment penalties, but do check this before accepting an interest only mortgage.
* You will be able to choose from several fixed or adjustable rate options.
Disadvantages of Interest Only Loans
* If you do not plan how you are going to pay off the loan balance you could loose your home.
* Even if you plan, sometimes-unforeseen circumstances happen and you could loose your property. For example, you could become disabled, therefore not be able to save for that lump sum payoff.
How To Pay Off An Interest Only Mortgage
Before you accept an interest only mortgage, make sure you know how you intend to pay off the loan. It is just too risky not to know the end results of how you will accomplish this payoff.
Your Main Options are to:
* Sell the property to pay off the loan. If you have been paying your on your loan for at least 5 years, then it is very likely that the home values have increased and the property is worth more than you paid for it. You might choose this option if you know you will want to move by this time.
* Save the money that you normally would have paid in principal and put it into savings or other investment plan each month to build a lump sum. Then when you are ready to pay off the mortgage balance or a large portion of it at specific times. You will have more money to pay off the mortgage in less time than an amortized loan. Because you have been saving the principal portion plus earning interest and / or dividends (assuming you invested your money in the right places). You might choose this option if you are disciplined to save that extra money in the proper markets.
* Use a lump sum from somewhere else. For example, you have other real estate properties that you want to sell and have a lot of equity built up. Or maybe you just received an inheritance. Maybe you just won the lottery or sold a business. There are many ways people receive large sums of money. However, this could be risky, unless you know for sure where you are getting the money from.
* You could convert to a regular payment amortized mortgage after a certain amount of years. For examples, after 5 or 10 years convert the mortgage to a regular mortgage paying principal and interest until it is paid off. Usually, your earnings will be higher in this amount of time. You will be trained for your job by then. Maybe you will be out of college and earn more money. Therefore, you will be able to pay more per month on your mortgage. If you still like your home, it makes sense now to build equity in your home.
Summary
Again, these interest only mortgages are not right for everyone. We highly recommend you speak with a financial advisor about you short and long term goals before accepting this type of option.
The math to find interest is: Loan amount x interest rate /12. For example, $100,000 x .06 = $6000 / 12 = $500.00 per month. As you can see paying $500.00 per month for a $100.000 home has a very low payment.
The interest only mortgage was designed for people whose income fluctuates. For examples, a sales person with a low salary and paid a bonus 2 or 3 times a year, would really benefit from this interest only loan. This person would have a low payment when there was no bonus. In turn, when the bonus was paid, the person would be able to pay on the principal.
There are several options of interest only mortgages. Some of the popular options are: 1 year, 3 years, or 5 year plans and these can either be a fixed rate or an adjustable rate mortgage. You can talk with a Loan Officer to see what they offer.
LIBOR RATE
Many lenders that offer interest only mortgages are now basing them on the LIBOR Index. LIBOR is an abbreviation for: "London Interbank Offered Rate". It is the interest rate offered by a particular group of London banks for US dollar deposits of a stated maturity.It is usually more stable rate than the Treasury rate.
Who Uses Interest Only Mortgages?
1. People who want to invest their money in the stock market and not tie up that money in a house. They like to take risk. Many people make a lot of money this way.
2. Some people are more concerned with low payments than having equity in their property. They know they will live in this home for a short period of time before they will sell.
3. The professionals that are graduating from college are concerned with buying a lot of house for the money now, knowing that in the future they will be able to pay more. These are typically attorneys and doctors.
4. Real Estate investors like interest only mortgages because they pay low payment now with no negative cash flow. The tenants pay the whole interest payment for the investor. And when the property appreciates enough, the investor sells and pays off the mortgage.
Advantages of Interest Only Loans
* You will have Greater Purchasing Power.
* You will be able to afford more house for the money.
* You should have payment flexibility. When you have extra money is the time to pay down the principal loan balance. Most lenders do not have prepayment penalties, but do check this before accepting an interest only mortgage.
* You will be able to choose from several fixed or adjustable rate options.
Disadvantages of Interest Only Loans
* If you do not plan how you are going to pay off the loan balance you could loose your home.
* Even if you plan, sometimes-unforeseen circumstances happen and you could loose your property. For example, you could become disabled, therefore not be able to save for that lump sum payoff.
How To Pay Off An Interest Only Mortgage
Before you accept an interest only mortgage, make sure you know how you intend to pay off the loan. It is just too risky not to know the end results of how you will accomplish this payoff.
Your Main Options are to:
* Sell the property to pay off the loan. If you have been paying your on your loan for at least 5 years, then it is very likely that the home values have increased and the property is worth more than you paid for it. You might choose this option if you know you will want to move by this time.
* Save the money that you normally would have paid in principal and put it into savings or other investment plan each month to build a lump sum. Then when you are ready to pay off the mortgage balance or a large portion of it at specific times. You will have more money to pay off the mortgage in less time than an amortized loan. Because you have been saving the principal portion plus earning interest and / or dividends (assuming you invested your money in the right places). You might choose this option if you are disciplined to save that extra money in the proper markets.
* Use a lump sum from somewhere else. For example, you have other real estate properties that you want to sell and have a lot of equity built up. Or maybe you just received an inheritance. Maybe you just won the lottery or sold a business. There are many ways people receive large sums of money. However, this could be risky, unless you know for sure where you are getting the money from.
* You could convert to a regular payment amortized mortgage after a certain amount of years. For examples, after 5 or 10 years convert the mortgage to a regular mortgage paying principal and interest until it is paid off. Usually, your earnings will be higher in this amount of time. You will be trained for your job by then. Maybe you will be out of college and earn more money. Therefore, you will be able to pay more per month on your mortgage. If you still like your home, it makes sense now to build equity in your home.
Summary
Again, these interest only mortgages are not right for everyone. We highly recommend you speak with a financial advisor about you short and long term goals before accepting this type of option.