Description
An interest-only mortgage allows the borrower to pay only the interest on the loan for a specified time, typically 5-10 years. After the interest-only period, the payment will increase to include both principal and interest.
Benefits
- Lower Initial Payments: During the interest-only period, payments are lower, allowing buyers to afford more expensive homes.
- Flexibility: Buyers can choose to pay more than just the interest if they wish, which will reduce the principal balance.
Requirements
- Credit Score: Typically higher than for conventional loans, often above 700.
- Income Level: Borrowers must demonstrate they can afford the eventual increase in payments once they begin paying down the principal.
- Down Payment: At least 20% to avoid PMI and to qualify for most interest-only loans.
Loan Options
Most interest-only loans are structured as adjustable-rate mortgages, adding a level of risk due to potential rate increases in the future.
FAQs
- Who should consider an interest-only mortgage?
- This type of loan is best for borrowers who have irregular incomes or plan to sell the property before the interest-only period ends.
- What are the risks of an interest-only mortgage?
- If the home’s value decreases, borrowers may owe more than the home is worth. Additionally, payments will increase significantly once the interest-only period expires.
- Can I make principal payments during the interest-only period?
- Yes, borrowers can make principal payments during the interest-only period without penalty on most loans, which decreases the total amount owed and reduces future payments.
- What happens at the end of the interest-only period?
- The loan re-amortizes to include principal and interest, resulting in higher monthly payments.
- Is refinancing possible after the interest-only period?
- Yes, borrowers can refinance to a different mortgage type if they prefer not to start paying principal on the original loan.
