There are several types of loans that could be categorized as "interest-only." Many are hybrids of common loans, such as Adjustable Rate Mortgages (or ARMs) or Fixed Rate Mortgages, with added interest-only options. Even with the wide variety of interest-only loans available, all are characterized by low monthly payments during an interest-only period, and significantly higher payments once that initial term has expired. The terms may also vary depending on the type of interest-only loan selected.
Here are some of the most common types of interest-only loans:
Option ARMs are a type of Adjustable Rate Mortgage that gives borrowers a significant amount of flexibility when making payments, and greater control over their monthly cash flow. Borrowers can typically choose one of four payment options:
- Interest-Only Payment
This payment option covers the interest accrued in a given month. Interest-only payments do not go toward any of the principal, resulting in no equity being built in a home.
- Minimum Monthly Payment
The minimum monthly payment option is actually less than the interest-only payment. The difference is added to the principal balance, resulting in negative amortization. This option is good for borrowers who will compensate for that difference in future payments.
- Full Principal and Interest Amortized Over 30 Years
This payment option is very similar to those of a traditional mortgage, including both the principal and the interest over a 30-year amortization schedule.
- Full Principal and Interest Amortized over 15 Years
This is the most expensive payment option and, like the 30-Year option, includes both the principal and interest on an amortization schedule.
ARMs with Interest-Only Payments
These are Adjustable Rate Mortgages with a set period during which all payments are interest-only. The lender calculates the interest rate by using a margin percentage and an fluctuating index value, which is a rolling indicator of various economic trends. The index value is re-evaluated at specific intervals determined by the loan type.
Fixed Rate Mortgage with Interest-Only Payments
Fixed Rate Mortgages have locked-in interest rates that don't fluctuate during the life of the loan. The interest-only clause gives the loan a term during which all payments are interest-only, after which the principal is amortized over the remainder of the loan.
Depending on the lender, there may be a large number of variations of these common types interest-only loan, so it is always best to check with a mortgage professional about all available loan options when refinancing your mortgage or purchasing a home. If you have questions about the different types of loans available, or are thinking about refinancing, please feel free to call me at(707) 252-2700. Together, we can discuss your financial needs, and find the options that would allow you to meet them. I hope to speak with you in the near future!
Custom Lending Group