The Skinny on Interest Only Loans

By now, you may have heard about the latest, hottest, newest mortgage product- the “interest only” mortgage. What this product does is allow the homeowner to pay only the monthly interest on the mortgage instead of paying any portion (amortize) of the principle balance. This new mortgages come in all styles and flavors, anywhere from a monthly adjustable, currently in the 3% range, to 30 year fixed rates (conforming only).

With the lender allowing interest only payments the monthly payment can be significantly reduced for the first few years of the mortgage. Also, by allowing a borrower to qualify with an interest only payment, the borrower can now qualify for a larger mortgage. These mortgages also differ from potential negative amortizing loans home loans since the minimum payment that a borrower makes will pay all of the interest for the month. The minimum payment on a potential neg-am loan will many times not cover the total interest accrued which results in the principle balance of the loan increasing.

The interest only portion can be anywhere from the first 5 to 10 years of the loan. This is the time when the lender expects your earnings to increase also so that you can start to pay down the principle. This is good because, in most cases, once that optional interest only payment ends the loan is then amortized over the remaining life of the loan. In simple English this means that instead of a 30 year loan you now have a 25 or 20 year loan and your payments will reflect that shorter term. Of course you could refinance at that time, too.

Give me a call and we’ll find out if this is the loan for you.

An official announcement about an increase in the conforming loan amount hasn’t been made yet and is expected within the next few weeks. Some lenders are accepting conforming loans at $350,000 in anticipation, though.

Fixed interest rates for conforming loans (under $333,700) as of 11/22/04 (a.m.) are:
30 year: 5.5% (APR 5.59%) payments are $1,894.71/mo.
15 year: 5.125% (APR 5.28%) payments are $2,660.66/mo.