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FINANCING
OPTIONS...INTEREST ONLY LOANS
This page on interest-only
mortgages is provided for informational purposes only. I have never
been an
advocate of this loan because I just happen to be a little more conservative
than most people. Interest-only loans work for certain people, but make
sure you full understand how it works and things to consider first .and
should be reviewed with a reputable mortgage lender.
With skyrocketing home prices,
many home buyers - fearing they will be left out of the market - are
turning to mortgages with interest-only payment schedules so they can
afford to buy a more expensive home. Although these mortgages have lower
monthly payments, they don't last forever, and interest-only loans aren't
for everyone.
In fact, this loan type
is part if the reason we're in the middle of a mortgage meltdown and
credit crisis. I encourage my clients to buy a home you can afford
today because the future is never guaranteed. Having said that, I
will provide some information on interest-only mortgages.
What is an interest-only
mortgage?
There are many varieties of mortgages with an interest-only payment
option. Essentially, they work like this: You will make interest-only
payments for the first 5, 10 or 15 years. The monthly payments are lower
than they would be with a fully amortized loan during this initial period,
but at the end of the interest-only payment period, you still owe the
entire amount borrowed.
Unlike a fully amortized loan
- where part of each monthly payment pays back a portion of the principal
(the amount borrowed) - a fully amortized payment schedule pays back the
loan in full during the term of the loan, which is typically 30 years. At
the end of 30 years, your mortgage is paid off and the home is finally
yours!
EXAMPLE:
|
$250,000 @ 6%
Interest-Only Mortgage
w/ a 5-year payment plan |
vs. |
$250,000 @ 6%
30-Yr Fixed-Rate Mortgage |
Monthly Payment = $1,250
(a $249/mo
savings) |
|
Monthly Payment = $1,499 |
|
Payment
After 5th Year |
|
|
Monthly Payment = $1,611
(a $361/mo
increase) |
|
remains the same |
|
The assumption is that your income will increase accordingly over
the years to support the higher monthly payments. |
Why choose an interest-only mortgage?
Although mortgages with interest-only payment options cost more over the
30-year term of the loan, they will save you money in the short-run, which
will help you get into the home today. Additionally, most borrowers
end up paying off or refinancing their mortgages well before the end of
the full 30-year loan term.
Borrowers with sporadic
incomes (like the self-employed) can benefit from an interest-only payment
plans - especially if the mortgage is one that allows you to pay more than
the interest. In this case, you can pay interest-only during lean times
and use bonuses or income spurts to pay down the principal to help build
equity.
Things to consider with
interest-only mortgages.
-
If you're solely relying on
home-price appreciation to build equity, you could find yourself
in a financial bind if home prices should suddenly drop and, for
whatever reason, you are forced to sell.
-
Not all interest-only
mortgages have a fixed interest rate. Some have one rate for the initial
interest-only period and a higher rate - with a much larger monthly
payment - for the remainder of the loan term.
Deciding which mortgage/loan
option works best for you requires a great deal of thought. Simply
shopping for the best APR or % will most likely get you into deep
financial trouble and cost thousands of dollars more than needed.
When you need help deciding
which mortgage option is right for you, call me at 303-520-3179 and
I will put you in touch with a local mortgage lender who will thoroughly
explain the pro's and con's of each loan program and will help you make
the best decision for you and your family.
*
THE BENEFITS OF OWNING A HOME
*
If you would like to sit
down for coffee and discuss the Denver Real Estate market, just call me
anytime at 303-520-3179.
Anthony Rael, Metro
Brokers Arvada-Northwest offers professional & trustworthy real estate
services to buyers &
sellers throughout the
Denver metro area including
Arvada,
Brighton,
Broomfield,
Denver,
Golden,
Highland/Sloan's Lake,
Highlands Ranch,
Lakewood,
Littleton,
Louisville,
Longmont,
Thornton,
Westminster,
Wheat Ridge, Adams
County,
Denver County &
Jefferson County.
Leverage my life-long
knowledge of the Denver Metro area - from homes, condos, lofts or
investment properties, new homes builders, schools & local amenities to
reliable & trustworthy business partners like mortgage brokers & home
contractors to
maximize
your investment, secure your future and realize the home of your dreams.
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