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An INTEREST ONLY LOAN is a home loan program where you have an
option to pay just the interest for a defined period of the note. An
interest only loan does not mean you will never pay principal. These
“adjustable rate” mortgage programs simply have what's known as an
interest-only payment option attached to the note. However you can
choose to pay principal if you want or interest only. In most cases
the note will state how long your interest-only payment option will
last. Let's use a 5-year interest-only mortgage for example.
First 5 Years (60 Months)
Your only obligation is
interest-only payments during this initial term. Your interest only
payments are usually based on a fixed rate for these initial
years.
Remaining 25 Years
During the beginning of
the 6th year (month 61) the unpaid balance is fully amortized over
the remaining term and the borrower is now obligated to make
principal and interest payments to the lender. Think of it as taking
a 25-year mortgage on an adjustable rate note tied to the then
current interest rates. Although your loan will be subject to future
market rates your margin will not change throughout the remaining
term of the loan. Your interest rate will adjust regularly
(usually on an annual basis) according to the original terms of the
interest-only mortgage note. Let's say your note called for
your interest rate to be determined by adding the current libor rate
+ a margin of 2.25. If the libor rate is 2.00% during month 61 you
will have a new interest rate of 4.25% until the next adjustment
period. It's important to remember that these are now
principal and interest payments so your payment may be higher even
if your interest rate is lower.
ANOTHER Adjustable Rate
Mortgage CHOICE IS AN Option Arm
OPTION ARM LOANS
come with four payment options. Depending on interest rates you will
receive the option to make either one of these payments upon receipt
of your mortgage statement. You can pick any option each month
interchangeably. These loans also usually include the following
measures to reduce your risk of rising interest rates.
•A fixed
interest rate for an initial 1-month period with monthly interest
changes forward.
•A minimum payment amount that adjusts on an
annual basis
•A 7.5% payment change cap limits how much the
minimum monthly payment can increase or decrease from the previous
minimum payment. (Many lenders make exceptions so this cap is
not in effect during the fifth year of your loan and every five
years thereafter)
•A lifetime interest rate cap that protects
you by limiting how high your interest rate can go
ARM
PAYMENT OPTIONS (EACH MONTH)
Option 1: Minimum Payment
Due (provides greatest monthly cash flow savings)
Payment
changes annually and is calculated using the initial interest rate
for the first 12 months. The minimum monthly payment is usually
re-calculated annually and based on the outstanding principal
balance, remaining term and then current interest rates. This
payment is usually capped at a 7.5% annual increase or
decrease.
Option 2: Interest Only
Payment
When the minimum monthly payment is not sufficient to
cover the monthly interest due a homeowner can avoid deferred
interest by paying the minimum monthly payment plus any additional
interest accrued during the month. Please note that this option is
not offered if the interest only payment is less than the minimum
payment due.
Option 3: 30 Year Fully Indexed
Principal and Interest Payment
This is the fully amortized
payment based on a 30-year loan and is calculated each month based
on the prior month's interest rate, loan balance and remaining
term. The biggest advantage to this payment option is that the
payment pays all of the interest due and reduces your principal.
Please note that this option is not offered if the full principal
and interest payment is less than the minimum payment
due.)
Option 4: 15-Year Full Principal and Interest
Payment
The largest monthly payment option which allows a
consumer to apply the most towards principal and term
reduction. This payment is calculated to amortize your loan
based on a 15-year term from the first payment due date. Please note
this option is offered only on the 30 or 40-year term program and
will cease to be an option once the loan reaches its 16th
year.
Adustable Rate Morgages can offer:
1.
GREATER PURCHASING POWER
A large number of homebuyers expect
to see income rise over the next few years and today's markets also
make a good argument for investing in real estate before the stock
market. With many "Interest Only" home loan programs you can
benefit from lower qualifying payments enabling you to buy more home
while still maintaining the security of a fixed rate for a defined
period of time.
2. PAYMENT FLEXIBILITY
Most
lenders do not impose restrictions or penalties should you wish to
start paying down the principle loan balance at times convenient to
you. Even if your loan has a prepayment penalty many lenders will
still even let you pay up to 20% of your loan balance during any
12-month period without triggering the prepayment clause.
Call one of our trained loan officers today to explain the ARM
products to you. Or apply
online. We will get back to you within 1 business day or
sooner.
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