Interest Only Mortgages

An Interest only mortgage can be an excellent choice for some borrowers. They are designed to offer the lowest payment possible as you are not paying anything toward the principal in your normal monthly payment. Because of the lower payment, the interest only loan may mean that you can buy more home than with a fully amortizing mortgage. Of course, you may make additional payments toward your principal balance at any time.

The interest only product was originally designed for individuals whose income is cyclical. For example, an individual who is a sales executive with a relatively low base salary but commission or bonus payouts quarterly would benefit from an interest only mortgage. You would have the lowest possible payment during months when no bonus is paid and you would be able to make contributions to the principal balance when the quarterly bonus is paid. However, I am seeing individuals in many situations choosing this option as a method of lowering their payment, sometimes significantly.

Generally, interest only mortgages are available for a 30 year term, with the first 5 or 10 years interest only (depending on the lender selected) and the final 20 to 25 years fully amortizing although I am now seeing some progressive lenders offering this option on ARMs. Some lenders who offer an interest only mortgage require a prepayment penalty for the first 1-3 years and have caps on the amount your rate can change at any time and over the life of the loan. I always try very hard to avoid prepayment penalties on these and other types of loans and can usually work around the requirement. Another useful feature of some interest only mortgages is that if you choose to make a principal payment during the interest only period, your balance is reduced the following month lowering your payment further.

Again, an interest only mortgage is not the right choice for everyone, but it can be a very effective choice for some individuals. Please call or send an email and I will be happy to discuss this alternative with you.

An example of how powerful this tool can be:
On a $250,000 mortgage at 6.000% for 30 years

Principal and Interest payment	$1498.88
Interest Only mortgage payment at 6%	$1250.00
Total Monthly saving	$248.88