![]() The down payment, debt-to-income (DTI) ratio and credit score you will need are entirely up to the lender. Unlike agency mortgages, there’s no strict set of minimum requirements to qualify for an interest-only mortgage. The lenders that still offer interest-only mortgages tend to the hold them in their own portfolios or sell them to certain investors with an appetite for such risk. Part of the reason why interest-only mortgages are harder to come by is because they were a contributor to the 2008 financial crisis as borrowers could no longer afford the spike in mortgage payments when the loan ammortized and home values were underwater. You also won’t find interest-only Federal Housing Administration (FHA), Veterans Affairs (VA), or U.S. Freddie stopped in 2010, and Fannie stopped in 2014. This means that Fannie Mae and Freddie Mac-the government-sponsored enterprises that buy most mortgages from lenders to help credit flow to homebuyers-don’t purchase or back interest-only mortgages. Interest-only loans are considered nonqualified mortgages. Those other uses may come with additional risk that the average homeowner can’t afford to take on, however. And they may have better uses for their money during the interest-only period that they come out ahead in the long run. Many people won’t keep their interest-only loan for the full term. Now compare these totals to what you’d pay for a 30-year, fixed-rate mortgage with no interest-only period: $515,691 ($215,691 in interest, plus $300,000 in principal). 40 yearsģ0-year loan with 10-year interest-only periodĤ0-year loan with 10-year interest-only period ![]() Total interest on an interest-only $300,000 loan with a 4% fixed rate: 30 years vs. The most significant cost is the additional interest you might pay in the long run compared to having a fully amortized loan from the start. You can also expect to pay all the usual closing costs, like an origination fee, title insurance premium and appraisal fee. ![]() And you will likely get the best rate by shopping around to get quotes from several lenders that’s more specific to your price point and credit profile. You may have to shop multiple lender websites to get a general idea of rates.Īs with any mortgage, you can expect to pay a rate in proportion with the loan’s risk. The national average interest-only mortgage rate is not as widely available like other popular 30-year fixed, 15-year fixed and 5/1 ARM rates are. But if you can’t due to a financial situation or market circumstance, it’s better to understand early on the possible long-term implications of an interest-only mortgage (especially an adjustable-rate one) before you sign the paperwork. Many borrowers plan to sell or refinance before the interest-only period ends. This means your monthly payment can increase more based on the fluctuations in the adjustable-rate market.įinding out the loan’s interest-rate floor, cap and lifetime maximum can help you forecast different monthly payments, including best- and worst-case scenarios. ![]() If you choose an adjustable-rate, interest-only mortgage, you’re taking an additional risk because you don’t know what the interest rate will be when the interest-only period ends. Keep in mind that the interest rate on an interest-only loan may be fixed or adjustable. Next 20 years, fully amortizing interest and principal (first payment) Next 30 years, fully amortizing interest and principal (first payment) Interest-only mortgage payments: 40 years vs. Below is an example of how the interest and principal payments work on an interest-only loan of $300,000 at a 4% fixed rate. For example, the fully amortizing period might be 20 years or 30 years, after the interest-only period of up to 10 years. Interest-only mortgages come in different term lengths. But that is also based on local market conditions. It’s also important to note that if you don’t pay any principal, you don’t accumulate equity, unless the market value of your home goes up. As more of your monthly payments lower the principal balance, the interest charged will also be less because it’s based on the total balance. That means you then pay principal and interest every month. In the case of an interest-only mortgage, once that interest-only period ends, the loan becomes fully amortized. In this scenario, your overall principal mortgage balance declines every month which means the interest charged is lower the following month. Most mortgages require you to pay both interest and principal each month. The result is a lower payment during those initial years and a higher payment thereafter in order to meet the principal payments, unless you refinance repeatedly or sell the home while still under the mortgage. An interest-only mortgage allows you to pay just the interest and no principal with each monthly payment, usually for the first five, seven or 10 years of the loan term.
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