A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only loans are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.
You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.
Since you'll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.
As an example, if you borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time.
Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.
Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.
All loan approvals are conditional, not guaranteed and subject to lender review of all information. Loan is conditionally approved when lender has issued approval in writing, but until all conditions are met, loan cannot be funded. Specified rates may not be available for all borrowers. Rate subject to change with market conditions. C2 Financial Corporation is an Equal Opportunity Mortgage Broker/Lender. In California, This licensee is performing acts for which a real estate license is required. C2 Financial Corporation is licensed by the California Bureau of Real Estate, Broker # 01821025; NMLS # 135622. For state licensing information outside of California, click here. C2 Financial Corporation is approved to originate VA and FHA loans, and has the ability to broker such loans to VA and FHA approved lenders. C2 Financial Corporation is not acting on behalf of or at the direction of HUD/FHA or the VA.