Interest Only Mortgage Option
With a normal mortgage payment, you have to pay the amortized portion of the principal balance and the entire amount of interest that has accrued over the previous month. With an Interest Only Option, it is possible to set up a loan so that you only have to pay the monthly interest due on the loan. It is called an “option” because you can pay the minimum amount (i.e. the interest due) or you can pay both the principal and the interest.
How It Works:
Depending on the Loan Product, an Interest Only Option is available on Fixed and Adjustable Rate Mortgage Programs. Loans with an Interest Only Option are typically amortized over a 30 year term. A Fixed Rate Mortgage with an Interest Only Option will typically allow interest only payments for the first 10 years of the loan. At year 10, the loan will recast. This means that the remaining principal balance (i.e. what you still owe) will be amortized over the remaining 20 year term. The Interest Only Option period on an Adjustable Rate Mortgage is typically 10 years. However, some ARM programs set the Interest Only Option period to the initial fixed rate period of 3, 5, or 7 years.
Notwithstanding appreciation, the equity in a property does not increase when a borrower makes the interest only payment on a mortgage. Seeing as how lenders rely on the equity in the property in the case of borrower default, underwriting guidelines for Interest Only loans are less lenient than fully amortized loans. Lenders will require more reserves, higher credit scores, and more equity when a borrower is requesting an Interest Only Option.
Features & Benefits:
- Lower monthly payments
- Payment Flexibility: Pay principal payments when convenient or use the savings to make payments on your higher-interest second mortgage.
- Invest the cash savings: Use the additional cash flow to fund tax deferred retirement accounts.
- Buy more house: Remove the financial burden of a larger mortgage by using an Interest Only Option.
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