Interest Only Mortgage

An Interest Only Mortgage is a type of mortgage offered to people who want to have a lower initial payment on a refinance or a purchase. Other advantages are you can either pay interest only or both interest and principal on the mortgage. Typically, the interest only payments last for the first 3, 5, 7 or 10 years. After this period, the payments become principal and interest and amortized for the remaining years left on the loan. For example, if you select a 5 year interest only ARM loan with 30 years, the first five years will be interest only payment and the remaining term of 25 years will be amortized for 25 years. You can get some valuable advice from a licensed mortgage lender or broker who specializes in interest only loans.

The indexes used in for interest only loan are commonly the libor index. LIBOR (abbreviation for "London Interbank Offered Rate") is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. The majority of interest-only loan programs are tied to the LIBOR index rate although some lenders use the CMT (treasury), MTA, and COFI indexes.

Is an interest only loan the right solution?

Interest only loans are typically not used for extended loan periods or long term. Although these mortgage can offer a homebuyers an excellent choice; for example:

High Net Worth Individuals
Borrowers who prefer to invest the money difference into a better yielding investment versus putting it into the property.

New Professionals
Borrowers who know for sure their income will rise and prefer to have more purchasing power. For example, young attorneys and physicians

Intermediate Homeowners
Borrowers who will only be staying in the house for a relatively short period of time such as 3 to 5 years due to a family addition, work or other circumstances and want to have lower payments than paying principal.

Real Estate Investors
Borrowers buying property for investment purposes in locations where real estate appreciation and demand is high.

If you are not included in this list, you can still choose an interest only mortgage or principal and interest. Keep in mind, you can always pay principal and interest on your home loan.  It is ultimately your choice if an interest only mortgage can benefit your personal situation. Look at comparisons sisde by side provided by mortgage lenders or speak with your financial advisor so you can make an educated decision for you and your family

An interesting fact is interest only loans for homes began in the 1920's and then the US Government switched to an fully-amortizng loan. However, then the loan balance was fully due at ending term since a loan was only good for 5 or 10 years.