Interest only advantages - An interest only loan is a loan where you only pay the interest that is due each month. Your principle balance always remains the same. One advantage of an interet only loan is that your monthly payment will be lower, since you arent paying down the balance at all. This gives you more cashflow each month and allows you to manage your finances more efectively.If you are currently having trouble qualifying for a mortgage because your debt to income ratio (DTI) is to high, an interest only loan may be able to help you get your new mortgage. Since the payments are less, your DTI will be lower and it could be enough to qualify you for your new mortgage.
An interest only loan may allow you to buy another property or two if you are trying to become or you are a real estate investor. By lowering your monthly payments you may be able to qualify for more properties with the lower debt ratios that the interest only loans may provide. Interest only loans are great for real estate investors and for purchasing a second home, especially in areas with high appreciation.
Although you aren't required to pay down the balance of your loan with an interest only loan, you still have that option. You can choose to pay more each month if you would like to pay the loan off faster. A competent loan officer should be able to tell you how much extra to pay each month in order to pay off the loan by a certain time. You can choose to pay any amount that is greater than the interest payment.
An advantage of interest only loans is you get to decide how to spend that money every month to benefit you most. Perhaps you want to pay it toward higher rate credit cards. Perhaps you want to pay off your car loan sooner. Perhaps you want the option every month of paying it toward your mortgage or not. Your choice!
An interest only loans payment will decrease as the principal balance is payed off.
The advantage of the interest only payments is the monthly savings compared to an amortizing payment (principal and interest). The basic premise is that in the first 5-10 years of a mortgage you hardly pay any of the principal down to build equity. In most cases the vast majority of equity comes from the increased market value of the home and not the principal balance being decreased by amortized payments
If your home is an income producing property, payments on an interest only mortgage may be fully covered by the rental income, thereby allowing you to own the property without making out of pocket mortgage payments.
If you live in an area that is appreciating quickly, an interest only loan allows you to reduce your monthly payment. The appreciation will build equity in your home even if you don't pay down any principle.
Interest only loans are available with various terms. The interest only period may be anywhere between 5 and 30 years. The longer the interest only rate is fixed, the higher the rate.
Interest Only Mortgage - An interest only mortgage is a mortgage were the borrower(s) pay only the interest payments on the loan. Generally the term of an interest only mortgage is over 30 years with the interest only period either 5 or 10 years and then the loan will re-amoritize into a principle and interest loan for the remaining 20 or 25 years.
Interest Only mortgages are a great way to increase your cashflow. Often it is smartest to instead of throwing money at the mortgage to instead take an Interest Only mortgage. This will allow you more money each month to pay off other high interest rate debt.
You should weigh your options when considering an interest only loan. Don't hesitate to contact me to discuss your unique situation.
With most interest-only payment option loans, you can always pay extra towards the principal you owe at any time. When times are flush, pay down that principal. When times are tough, pay only the interest-only payment. You decide.
In areas with high appreciation such as 10% - 20% per year it's not necessary for a person to pay down the principle on a morgage to reap great profits in an investment property. This is where many people use I/O loans along with Neg-Am products.
Often times lower income borrowers or first-time homebuyers will apply for an interest only mortgage. This helps reduce their monthly mortgage cost while still being able to get into a home. Investors buying investment/rental properties will apply for interest only loans reduce monthly debt on their properties while increasing their cash flow from the rental payments.
The easiest way to figure the payments on an interest only mortgage is; loan amount x interest rate percentage / 12. An example of the payments on a $150,000.00 mortgage with a 7.50% rate would be;
150,000 x 7.50% = 11250 / 12 = 937.50
Interest only payments will not reduce the principal balance of your mortgage.
When dealing with smaller loan amounts be sure to compare actual monthly payments of a fully amortized and an interest only loan. Most of the time anything under $100K the difference is extremely minimal. This is Due to the fact that interest only rates are higher than your fully amortized rates.
Another advantage of the interest only mortgage is that most lenders allow the borrower to qualify at the interest only payment. Since this payment is lower than a fully amortized payment, the result is that the borrwer can qualify for a larger mortgage, usually meaning a better or bigger house.
Many people will get interest only loans to help relieve them of the financial burdens of all of their monthly bills. Obtaining an interest only loan can save you a considerable amount of money in your mortgage payment. While you are not paying down the principal on your loan amount your house is still appreciating therefore helping you to still build equity. Some people that obtain interest only loans will also use their income tax refunds to apply towards the principal of their loan each year. This way they still have the flexibility of a super low mortgage payment all year long and they still pay down the principal of their loan just as much, if not more than they would on a normal 30 year mortgage loan.
Interest Only loans are often utilized by those who expect their income to increase in the near future. College students who are expecting to graduate and professionals getting an advance degree can purchase the homes now which they otherwise cannot afford with their current incomes.
Having an interest only loan helps you to keep your monthly payments low. Although you do not reduce the principle balance of the loan, your house will appreciate over time, thereby building equity.
30 Yr. Interest Only Loan - The 30 Year Interest Only Loan is an exciting, yet relatively new loan program, that can be used to plan your investment choices and realestate options. One Great way this loan can be used, is to purchase a new home, when you may still be waiting to sell your previous home. When your previous home sells, you can transfer the proceeds to pay down the principal balance on your new Interest Only Loan, and your mortgage payment will decrease accordingly!
Interest only loans are great for real estate investors. They help real estate investors maximize their cash flow. Interest only loans are also very good for people in professions that know within a certain amount of time they are going be making a considerably higher income (such as a doctor, becoming a partner at a firm, knowing you are going to be accepting a higher position within a certain time, etc...)Interest only loans also can help homeowners to maximize their own cash flow in order to invest money into retirement accounts, pay off high rate debt, start a savings account, etc...
The interest-only option can also be useful when you are consolidating credit card debt and need to keep your monthly payments to a minimum. In months when you have extra cash, make an additional payment toward principal. As you retire debt, make that extra principal payment a monthly habit!
You will continue to have the option of paying more than "interest-only." However it is a good option to have in order to have a lower required payment when needed.
Generally the interest rate on an interest only loan is slightly higher than that of a loan that includes interest and principal.
Interest Only mortgages require payments of only the interest amount incurred in the initial few years. The most common Interest Only mortgage has a 10-year interest only feature, in which the mortgagor only needs to pay the interest accrued every month. For example, with the $200,000 loan at 6.5% fixed interest rate, the mortgagor only needs to pay $1,083 per month ($200,000 X 6.5%, divided by 12 months). After the 10-year interest only period, the loan is amortized to be paid off in the remaining 20 years.
Because the loan is re amortized to a 20 year note your payment will jump significantly compared to the 30 year amortized interest only loan.
A fixed rate interest only loan allows you to have a low interest rate and pay a low payment. Usually homeowners understand they will need to refinance in the future. This is because there interest rate will increase after the fixed period and they have had no principle reduction.
The interest only payment may also let you afford a slightly more exspensive house then you could afford with a standard principal and interest payment. Ask your mortgage broker for information on interest only programs and there benifits.
The balance of the mortgage that you take out on an interest only loan will always remain the same if you pay the interest only payment. A $150,000 loan that is an interest only loan and only the interest payment is made for 5 years will still have a $150,000 balance.
Fixed Rate Mortgage versus an Interest only Mortga - With a fixed rate mortgage (FRM), your monthly payments will be steady
Interest only loans are available with both fixed rates and adjustable rate mortgages. Paying the interest only allows borrowers to lower their monthly mortgage payment.
With an Interest Only loan, you make no payments to principle. They only way to gain equity is to make additional higher payments or choose a home in a high appreciation area.
In contrast, with an adjustable rate mortgage (ARM) , your payments will vary over time.
The average homeowner in America sells or refinances roughly every 5 years. Keeping this in mind, it may not always be in your best interest to go with a fixed rate mortgage for 30 years. An ARM loan may be more appropriate for you, especially if you know you plan on moving or refinancing within the first few years. A 5/1 ARM will generally provide a lower interest rate than a 30 year fixed rate mortgage will and the lower rate will equate to a lower mortgage payment. So think about not just the now when obtaining a mortgage but the near future as well.
Adjustable rate mortgages typically have an initial fixed rate lower than the rate of a comparable fixed rate mortgage. The initial fixed rate period is followed by adjustment intervals. For example, a "3/1 ARM" is fixed at an initial low rate for the first 3 years, and then adjusts every year based on an index. Common ARMs are: 1/1, 3/1, 5/1, 7/1, and 10/1. (Don't confuse ARMs and balloons )
Interest Only is an option that can be chosen for most types of mortgages, Fixed or ARMs. The interest only option allows the borrower to make only interest payments. This is usually only allowed for the first 5-10 yrs. Choosing an interest only option can also affect your interest rate. There is usually an add on of 0.25% - 0.5% to the interest rate for interest only payments.
How does an interest only loan work? - Over the past couple of year interest loans have become immensely popular due to the lower monthly payments. In some cases such as as skyrocketing home prices on the east coast and west coast have forced buyers to get interest only loans just to qualify for the mortgage payment.
With most interest only loans, you can pay as much over the interest only payment each month as you would like. Anything that is applied above and beyond the interest only payment each month will be applied directly towards the principle balance of your loan. Interest only loans provide borrowers with some extra flexibility with their finances each month by providing borrowers with a very low monthly payment.
A new program that is gaining in popularity is the 10/30 Interest Only mortgage. This mortgage has a interest only period of 10 years, after which it switches the a standard 30 year fully amortized mortgage. This loan combines the flexibility of low monthly payments with the security of a long term fixed rate mortgage.
Interest only loan programs are offered on fixed rate mortgages, adjustable rate mortgages, or on negative amortization mortgages. The biggest misconception is that borrowers on an interest only loan are given the option to pay "interest only" where the borrower pays only the interest portion of the monthly payment for a fixed period. At the end of that period your loan becomes fully amortized.
Choosing a loan with an interest only option will usually add .25% - .50% to the interest rate.
Consult with a licensed loan officer to determine if interest-only loan is a right loan for you. Compare the payments on the interest-only loan against other alternatives such as the loans with longer amortization periods such as 40 or 45 years.
Interest Only loans should not be confused with negative amortization mortgages, as there is no way to increase your principle balance provided you make your payments on time every month.
This difference in savings from making principle payments can be used for other things like paying off consumer debt or unforeseen expenses such as medical bills or a loss of income.
Interest-only loan - It’s a mortgage loan that is structured so that the borrower pays only the interest due for a certain amount of time; for example- three, five, seven, or 10 years. After the interest-only period has expired, the loan is renegotiated at the current interest rate for the remaining life of the loan. For example, if the loan were set up as a seven-year interest-only loan, the borrower would pay only interest for the first seven years. At that time the principal would be amortized over the remaining 23 years of the 30-year loan at current interest rates.
If you are retired or living on a fixed income an interest only loan can provide extra cash flow for your living needs.
During the interest only period you are paying nothing toward the principal of your loan. Therefore, your equity will grow more slowly. If home values are appreciating slowly in your area, it may be several years before your home will sell for enough to pay off your mortgage plus realtor fees and closing costs.
An interest only loan can increase the purchasing power for people can not find anything in their price range that they would even consider living in.
Interest only loan can provide extra cash flow for your living needs if you are retired or living on a fixed income.
Borrowers should always keep in mind that the interest only payment feature is an option. The borrower always is able to make payments towards principal reduction (within the parameters of any pre payment penalty restrictions) if they choose to do so. This is why an interest only feature is attractive to borrowers with fluctuating monthly income or who are self employed.
Interest only loans are great for self-employed and commissioned borrowers. Interest only loans provide more flexibility in making your monthly mortgage payments. For self-employed and commissioned borrowers this gives them the ability to pay more than the interest only payment when they have good months, and to pay the minimum interest only payment during slower months.
Interest Only loans are a compelling and attractive option for first time home buyers and borrowers whose incomes are increasing quickly every year.
One look at an amortization table from your lender is often all the reason a borrower needs to go the interest only route for 1 to 5 years, as in a classic principal & interest mortgage only a very small amount of principal is paid off in the same time period, and the money saved by the interest only borrower each month often can be much more useful in the borrower's pocket instead of the bank's.
Interest Only mortgages allow a home buyer to qualify for a bigger home with his current income. This interest only feature is useful for those who expect to have an increase in salaries and those who have other uses for their income.
Borrowers may want to look at the side by side comparison of an interest only loan compared to a regular Principal and interest payment loan and make a plan as to what they can do to productively make use of the difference such as investing or paying down higher interest debt.
After the fixed period of interest only payment, usually 5 or 10 years, the loan will be recasted into either 25 year or 20 year loan. The borrower needs to be careful and plan for the payment shock once the loan is recasted.
Interest Only Mortgages - How does an interest only loan work and why would I want a loan that I only pay the interest on and never pay down the balance? These are common questions asked about interest only loans everyday. An interest only loan is simply another option for consumers when they are dealing with a mortgage. There are fixed rate loans, adjustable rate loans, 30 year mortgages, 40 year mortgages, interest only home loans, etc... Interest only loans provide for a lot more flexibility each month in your monthly payment by requiring the borrower to only have to make the interest only portion of a mortgage payment instead of principal and interest. You are free to pay more than the interest only amount whenever you would like which will lower the principal balance of the loan and your home should always appreciate so you are still gaining equity in your home.
Interest-Only Mortgages are sometimes used by homebuyers to purchase a bigger home than they can otherwise afford. Because Interest Only home loans have monthly payments lower than that of fully amortized mortgages, homebuyers can acquire a mortgage with a higher loan amount.
An interst only payment may be a good option for those who are seasonally employed, self employed, or in commission based positions because it gives you the option to pay less when money is tight, and pay more when you have the ability to comfortably do so.
Interst only loans are also attractive to investors. The payment flexibility allows an owner to pay less if their property is not producing income.
However, on small loan amounts, an interest only payment may not be that much lower than a fully amortizing loan payment. Ask your loan officer to help you compare the two.
All interest only loans are interest only for a fixed period of time. (Generally 1-10 years, depending on the program) Make sure that the interest only option you are receiving will match your needs regarding how long you need the lower payment.
Interest-only loans also have some drawbacks. One pitfall is that attractive starting rates of interest-only loans may lure consumers into loans that they cannot afford long-term. For instance, once the "interest-only" part of the loan expires, say in five or 10 years, your mortgage payments can shoot up significantly, hundreds or even thousands of dollars more each month. Also, before the interest-only period expires, rates can increase, which will cause the monthly payment to increase.
Interest only mortgages can be very beneficial to the financially disciplined homeowner. Provided the homeowner can invest the equivalent of the principal payment that would be made on a fully amortizing loan and earn a return in excess of the after tax cost of interest the homeowner will come out ahead.
Interest-Only Mortgage (I/O) - "What is an interest-only mortgage (I/O)? Should I consider this as a loan option?"
Pros and Cons Of An Interest Only Loan - As with everything else in life, there are pros and cons to every type of mortgage available. Your personal situation will ultimately determine what type of loan is right for you at this time, but if you are considering an interest only loan these are some of the pros and cons that you should be aware of.
With an Interest Only loan the interest rate is lower than with amortized loans. Which means it's your lowest payment option other than negative amortization loans.
Refinancing into an Interest Only loan is the best option if you're not planning to keep the loan for more than 5-6 years.
One con of an interest only loan is that your loan balance never decreases if you only make the interest only payment each and every month. Many consumers get into an interest only loan thinking they will pay extra money, above the interest only payment, each month when they can however they never pay anything extra and their mortgage loan balance remains the same. Most consumers find reasons each and every month to take the money they are saving and apply it towards buying new things and never actually use the savings to pay down their mortgage loan. This strategy can be extremely harmful in the long term and can negatively affect retirement planning strategies.
Savvy investors that prefer to keep their assets as liquid as possible should consider an interest only loan. An interest only loan will free up cash flow every month that can be used for other investments.
Interest Only - Interest only loans are loans with an initial period of time where the borrower pays only the interest of the loan while the principle balance remains unpaid. This initial period varies from lender to lender, and program to program.
Interest only loans can provide a lower payment than a traditional fixed mortgage. Discuss the differences with your mortgage professional. Your mortgage broker will help you to understand which product will benefit you the most.
Figuring out your monthly payments are easy on an interest-only loan. Simply take the loan amount times the interest rate (7% would be .07) and divide that by 12.
Many borrowers use an interest only ARM loan program if they know they are only going to be in their property for a couple years.
Interest Only loans are often a good choice if you are disciplined enough to take the money you save from a fully amortized payment and apply the savings to other investments such as your IRA. They are also an excellent choice for investment properties.
Be careful when using an interest only loan that you don't buy more house than you can really afford...It can be a dangerous tool if used the wrong way...
30 year fixed rate interest only programs are becoming more popular. Usually many of these programs will offer an interest only payment period for the first 5 or 10 years and then will convert to a normal 25 or 20 year loan where you will make principal and interest payments. The rate will remain fixed from start to finish and will not change at all, not even when the interest only period is over.
Important information about Interest-Only loans -
With most interest only loans you can pay additional money that is above and beyond your minimum monthly interest only payment each month. With most interest only loans, this extra money paid will be applied directly towards the principal balance of your loan. This in turn will reduce the overall loan balance every time you pay extra. Interest only loans can be excellent financial tools when used properly. Consult a mortgage professional to see if this type of loan is right for you.
If you are sending additional money to be applied to principal, MAKE SURE the lender knows it's supposed to go towards principal. Some lenders will apply the extra money to your escrow account, which does not reduce your principal balance.
With an interest-only loan your monthly payment will be slightly lower. However, your interest rate will be slightly higher. Therefore, the interest you pay over the life of the loan will be higher.
Why pay interest only? - Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.
If you plan to refinance in the coming years, or not remain in the home or in the loan you have for the entire term of the loan, than sometimes interest only will be good for you. Just keep in mind that it does not pay down the principle balance on your loan.
Why pay interest only - do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or moreso from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense.
Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road.
Many lenders charge a small premium in order to have interest only premiums, usually 1/8th or 1/4p point. Make sure you discuss this with your mortgage broker as well.
With an interest only loan you will still build equity in your home even if you only make the interest only payments and never apply any extra payment towards the principal. This is achieved because your house is always going to appreciate and gain value (unless you live in a community with declining home values, which is not very common). Therefore, You can still gain equity in your home while freeing up cash to pay down other bills, invest, and/or just to simply put save for a rainy day.
Many people choose interest only loans to increase their cashflow and not be encumbered by such a huge mortgage payment.
Feel free to contact us for a good financial advisor to seek which routes are best for you.
One of the most popular loans for homeowners planning on remaining in their homes for 5 years or less is a minimum payment loan, which creates even more cash flow opportunity than an interest only mortgage by reducing the minimum amount of interest payable in a given month to keep the loan current.
Keep in mind that interest only does not mean that you will never have to pay the principal.
If one stays in the interest only mortgage for longer than the interest only period, the loan payment then converts to a principal and interest payment.
With any type of interest only loan you can choose to make additional payments to reduce your principal balance. These type of loans work very well with borrowers whose income may fluctuate on a monthly basis or borrowers who know they will be receiving a pay increase in the future and want to minimize the monthly payment until they have a larger income.
Interest Only loans allow you to purchase a larger house without increasing your monthly mortgage expense and it gives you mortgage payment flexibility to better manage your monthly cash flow without deferring interest.
Paying interest only may free up needed cash flow to help make payments on an investment property you may want to purchase.
Often times a real estate investor will want an interest only loan. The low minimum payments help to increase cash flow for other purchases.
The use of interest-only loans was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes. A recent Wells Fargo survey of American homeowners showed that the majority of homeowners do pay principal on interest-only loans when they are flush with cash. 73% pay both the principal and interest at least some of the time. Only 25% pay only interest all of the time. Interest-only options on home loans give the home buyer the flexibility to choose how much to pay on their mortgage each month - just the interest-only payment or a little extra to pay down that principal.
Interest Only mortgages require monthly payment of "interest only" for a specified period, ussually the intial 10 years of a 30 year loan term. At the end of the interest only period, the loan is reamortized to pay off the mortgage in the remaining 20 years. The monthly payments will naturally be much higher compared to that of the interest only period. In practice, most homeowner refinance before the end of the interest only period. The disadvantage of Interest Only loans is in that the homeowner will not build equity during the interst only period. There is also the risk that the home has since lost value when it comes time to refinance.
Paying interest only may allow you to contribute to your 401k, or IRA retirement account, because of your new lower monthly payment.
Interest only loans can also be of value for borrower's seeking to consolidate other debt carrying high interest rates like credit cards. By minimizing your mortgage payment, you can afford to pay down these other debts more quickly.
Is an Interest Only Mortgage A Good Idea? - Recently there has been a lot of press around "non traditional" loans, including interest only loans. Many people are worried that people might get themselves into trouble with these types of mortgages. As with any type of mortgage, there are situations where an Interest Only loan is the right fit for a particular situation.
Many types of mortgages include interest only options. You can get an interest only loan that is a fixed interest rate for 30 years, or choose one with a 1% or even lower minimum payment option as well.
Property rehab investors love Interest Only Mortgages as they typically plan on keeping the property for a short time while they renovate or replace the home.
I always recommend that if you plan on keeping a property or mortgage for 3 years or longer, not to get involved with an interest only mortgage.
An interest-only mortgage might be a good fit for someone whose income is mostly in the form of infrequent commissions, bonuses, or investment cashflow.
Another scenario which may be good for an interest only loan is for someone who will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money to off-set the risk involved with this type of mortgage.
Mortgage loans with "Interest Only" features are often used by home buyers who look to buy more home with a smaller monthly payment. Because "interest-only" mortgages require repayment of only the interests accrued for the prior month, and no repayment of the principal portion is required, home buyers can qualify for a bigger loan amount with the same monthly payment.
Interest Only - Interest Only payments are an increasingly popular choice to reduce monthly housing expenses. Unlike traditional mortgages, which require a borrower to make a payment to cover the interest payable on the mortgage first, and then a small amount of principal each month, interest only mortgages require the borrower to pay only the interest due each month, with the option to make payments to principal as and when the borrower feels it necessary.
Making interest only payments can be significatnly less expensive than paying a fully amortized, principal and interest payment on a traditional loan.
For example, a $500,000 mortgage @ 6% Interest Rate would have a normal, principal and interest payment of about $3,000
The same loan with an Interest Only option would require payments of $2,500 a month for the first 10 or 15 years, a cash flow savings of $500 a month (about 17% lower).
Interest only payments are a great way for a homebuyer to qualify for a more expensive home than they might normally be able to. Also, this is a great option for professionals or executives who may plan on relocating or upgrading within 3 years or so.
Interest only payments are a great way to increase cash flow. They are great options for investors who need to free up money so that they can use their available money elsewhere, such as repair work, buying additional properties, helping free up money when some of their rental properties sit un-rented, etc... Consult your local mortgage professional at 888-275-6788 or email them at info@bestnodocloans.com to find out if this may be the right type of loan for you.
