Interest Only Mortgage - Interest-Only Mortgage Loans
A interest only mortgage or IO is a loan in which you only pay the interest due each month and do not pays towards the principle balance. The interest only loans have a period of interest only after that time you to start making payments towards balance. Many of these mortgages have option and borrower right to pay more than interest due each month to lower the principle balance if they want to.
The traditonal mortgages like 30 years fixed rate mortgage require you to pay a set amount each month and your payment stays the same for term of loan and your principle balance will decrease over the life of loan. In Interest only plan you only pay the interest this way your monthly payment is much lower. The I-O period is typically from 1 to 10 years after that your monthly payment will increase even if the interest rate stays the same because you must pay back the principle during the remaining period of mortgage loan.
Payment Option ARM
A payment option ARM is like adjustable rate mortgage but allows you to choose payment type each month, there are limited options like traditional payment which include interest and money towards balance. You can make interest only payment in one month but without decreasing the mortgage balance. You may have option of a seperate minimum payment or limited payment which may even be less then interest due, if you choose this option the remaining interest will be added towards your principle balance and your mortgage will start increasing.
Advantages of Interest-Only Mortgage Loan
- Your income will increase by time to cover the higher monthly payment.
- You are planning to sell your property fast.
- If you have high comissions or seasonal income and want the option to pay full monthly payment or interest only.
- Property investers who are planning to flip and have a quick sale on home.
- You have credit problems and want to get in a new home to build your credit history on mortgage.
Remember the interest only loans are risky loans if you are planning to stay in your property for more than 5 years then you should consider fixed rate mortgages.
Introductory Rate period, this the period when you will have the low interest rates this can be from 1 month to 10 years, make sure you know how long it is because after that period your payment will increase.
The Interest rate adjustment periods, the interest-only ARMs have adjustment time after the introductory periods and your monthly payment may increase every time your rate will adjust, usually its 1 month to 6 months. This will give you idea how often your payment or rate may go up or down.
Payment adjustments and payment cap, the loans have minimum payment cap, minimum interest rate cap, the payment-option ARM have adjust periods for payment usually every year. The payment caps does not apply if your mortgage principle balance increses beyond the maximum balance usually 125% of the orignal amount you borrowed, if you hit the maximum then you must repay the loan during the remainder of your loan terms.
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