What is an Interest Only Mortgage
If you are looking for lower monthly payments in the first years of your mortgage, an Interest-only mortgage may be right for you. An Interest Only mortgage only requires monthly interest payments during the initial Interest-only period. Since you are not paying any principal, this can lower your monthly payment. This can mean significantly lower lower monthly payments during the interest only period of your mortgage. Since your mortgage's principal balance is not decreased, you will have a balloon payment at the end of the mortgage's term.
Interest Only Features:
- You can choose a 30-year fixed-rate mortgage, having an interest-only period of 10 or 15 years. At the end of the Interest-only period, either in the 11th or 16th year, your monthly payment will increase to include repayment of principal (the original loan amount) plus interest.
- Interest-only ARMs can be originated with interest-only periods that match the initial fixed-period such as 3, 5, 7 or 10 years.
- Interest-only ARMs are also available with fixed periods that do not match the Interest-only period. For example, Atlantic Mortgage offers Interest-only ARMs in which the Interest-only period is 3, 5, 7, or 10 years but within that Interest-only period, the interest rate is fixed for 1 month, 3 months, 6 months and 12 months. At the end of the fixed interest rate period (1, 3, 6 or 12 months), the interest rate adjusts up or down based on current market conditions. The interest rate will continue to adjust at the end of each fixed-rate period until the end of the Interest-only period.
- Your payment using the Interest-only ARM option may even be lower than with the fixed-rate mortgage.
- You can prepay principal at any time during the interest-only period. This reduces the future interest-only payments, since you would be paying interest on a lower principal amount. You can also prepay principal during the fully amortizing period. Although these prepayments do not change the scheduled payments or term, they let you pay off the mortgage sooner and thus pay less interest than originally scheduled.
- In markets undergoing strong price appreciation, an interest-only mortgage is a popular choice when trying to maximize the amount of house you can buy, you are limited by your income and your expected ownership period is less than the Interest-only period.