The loan product commonly called ‘Interest Only Mortgage’ is an interest-only payment option which is offered on fixed rate or adjustable rate mortgages or on option ARMs. The option to pay ‘interest-only’ lets you pay only the interest portion of your monthly payment for a fixed period (three, five, seven or ten years). At the end of that period your loan becomes fully amortized, thus resulting in greatly increased monthly payments.
Interest-only mortgages are still available, but they’re no longer offered to borrowers at the lower end of the affordability scale. Instead, criteria are likely to include a very high minimum income and a substantial deposit – usually of at least 25% and sometimes as high as 50%.
An interest-only mortgage requires payments just to the interest – the “cost of money” – that a lender charges. You’re not paying back any of the borrowed money (the principal).
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.
The cost to borrow money expressed as a yearly percentage. For mortgage loans, excluding home equity lines of credit, it includes the interest rate plus other charges or fees. For home equity lines, the APR is just the interest rate.
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An Interest Only Fixed-rate Mortgage that is amortized over 30 years permits the borrower to pay interest only for the initial interest-only period of 10 or 15 years. Following the initial interest-only period, the outstanding principal balance will be re-amortized over the remaining term of the loan.
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