All
Interest-Only Mortgages
PROFESSIONAL INSIGHT
Through years of mortgage and real estate experience it has
become more apparent to many people that the appreciation
and tax benefits of real estate is where financial wealth
comes from and not so much as to how much principal balance
someone pays down on a mortgage. Real Estate has skyrocketed
over the last 25 years and it has become harder for families
to realize the dream of owning a home. These loans not only
help you qualify for more home they will allow you options
that amortizing loans do not.
The national
average most people stay in a home is between 5-7 years,
why on Earth would
you take an amortizing 30 year
fixed rate loan, I know, because your parents did and their
parents did and so on. Let us try to give you some insight
on how these types of loans can significantly change your
cash flow position, it is important to understand that we
are in
no way telling you that you will be saving money, we are
explaining with these types of loans you will have options
and can decide
for yourself how to use the principal portion of your payment. Here
is an example of a $500,000 loan comparing a 30 year fixed
rate mortgage to a 5/1 ARM Interest Only, assuming you will
move in 5 years, again the caveat is if you do not move you
will be subject to the rates five years from now and you
may want to refinance. We will take that into consideration
also.
The rates quoted below are in no way an offer of a mortgage;
it is pure speculation of a scenario that could happen.
500K
30 year fixed rate jumbo mortgage loan @ 5.875% - payment
$2,957.69 per month for 30 years. Your principal balance
will be $464,547.20 after 5 years; you paid down $35,453.00
or just
7% of the total loan balance in 5 years. 500K 5/1 ARM Interest
Only mortgage @ 4.875% - payment $2,031.25 per month for
5 years. This is $926.44 a month cash flow position
or $55,586.40 in 5 years that you have created for yourself.
This
is a typical scenario of what we see in the industry today.
You benefit not only because your interest rate is lower,
you also have the option to decide what you want to do with
the
principal portion of your payment, college tuition maybe,
pay down some credit cards, you decide. With families struggling
to make ends meet today or the financial expert who wants
to
have additional options to use and invest their money in
other areas, these loans benefit both.
Interest only home loans offer
consumers greater purchasing power, increased cash flow and
a number of other benefits.
Not for everyone, but extremely beneficial to the people
these loans are tailored for. The mortgage market has a number
of
programs available to consumers and below is a list of some
of the most popular loan types:
1 MONTH ARM - INTEREST ONLY OPTION
The interest rate on this loan is the sum of the LIBOR index
plus a margin rounded to the nearest one-eighth of one percentage
point, (0.125%). The margin will not change throughout the
term of the loan. the index value will be adjusted every month,
which will cause the interest rate to be adjusted every month.
6
MONTH ARM - INTEREST ONLY OPTION
The interest rate on this loan is the sum of the LIBOR index
plus a margin rounded to the nearest one-eighth of one percentage
point, (0.125%). The margin will not change throughout the
term of the loan. the index value will be adjusted every
six months, which will cause the interest rate to be adjusted
every
six months.
3 YEAR ARM - INTEREST ONLY OPTION
The interest rate is fixed for the first three years of the
loan term. Years 4 thru 30 the interest rate is adjusted
every year to the sum of the LIBOR index plus a margin
rounded to
the nearest one-eighth of one percentage point, (0.125%).
The margin will not change throughout the term of the loan.
During
the first five years of the loan, the borrower is offered
an interest only payment option and a principal and interest
payment
option. Years 6 thru 30 require a principal and interest
payment.
5 YEAR ARM - INTEREST ONLY OPTION
The interest rate is fixed for the first five years of
the loan term. Years 6 thru 30 the interest rate is adjusted
every year to the sum of the LIBOR index plus a margin
rounded
to
the nearest one-eighth of one percentage point, (0.125%).
The margin will not change throughout the term of the
loan. During
the first five years of the loan, the borrower is offered
an interest only payment option and a principal and interest
payment
option. Years 6 thru 30 require a principal and interest
payment.
7 YEAR ARM - INTEREST ONLY OPTION
The interest rate is fixed for the first seven years
of the loan term. Years 8 thru 30 the interest rate
is adjusted
every year to the sum of the LIBOR index plus a margin
rounded
to
the nearest one-eighth of one percentage point, (0.125%).
The margin will not change throughout the term of the
loan. During
the first five years of the loan, the borrower is offered
an interest only payment option and a principal and
interest payment
option. Years 6 thru 30 require a principal and interest
payment.
MTA - Option ARM
This MTA ( Monthly Treasury Average Index ) based Adjustable
Rate Mortgage offers the borrower several payment
options. These options include a minimum payment and a
principal
and interest payment that is adjusted monthly. Under
certain conditions the borrower may be offered an
interest only
payment
option.
The interest rate on the loan is the sum of the MTA
index plus a margin. The margin will not change throughout
the term of
the loan. The index value will be adjusted monthly,
which
will cause the interest rate to be adjusted monthly.
The
minimum payment option is adjusted annually with a payment
cap adjustment of 7.5% of the prior years
payment. Every
five years the payment cap is suspended in order
to insure that
the loan will be paid off at the end of the loan
term. Because the interest rate will be adjusted
monthly,
the minimum payment
may or may not cover the amount of interest being
charged. If the minimum payment does not cover the
amount of
interest being charged, paying the minimum will result
in negative
amortization. This simply means that the balance
on your loan will increase
in the amount of the difference between the minimum
payment and the interest charge on the loan that
month.
The principal
and interest payment option is available every month. Since
the interest rate is adjusted
monthly, this
payment is adjusted accordingly. This payment option
will pay the loan
off based on a 30 year amortization. The interest
only option is not available every month. This option is
only available when the minimum payment
does not
cover all of the interest charge that month.
COFI
- OPTION ARM
This COFI (Cost Of Funds Index) based Adjustable
Rate Mortgage offers the borrower several payment
options.
These options
include a minimum payment and a principal and interest
payment that is adjusted monthly. Under certain
conditions the borrower
may be offered an interest only payment option. The
interest rate on the loan is the sum of the COFI index plus
a margin. The margin will not change
throughout
the
term of the loan. The index value will be adjusted
monthly, which
will cause the interest rate to be adjusted monthly.
The
minimum payment option is adjusted annually with a payment
cap adjustment of 7.5% of the prior
years
payment. Every
five years the payment cap is suspended in order
to insure that
the loan will be paid off at the end of the loan
term. Because the interest rate will be adjusted
monthly,
the minimum payment
may or may not cover the amount of interest being
charged. If the minimum payment does not cover
the amount of
interest being charged, paying the minimum will
result in negative
amortization. This simply means that the balance
on your loan will increase
in the amount of the difference between the minimum
payment and the interest charge on the loan that
month.
The principal and interest payment option
is available every month. Since the interest rate
is adjusted
monthly, this
payment is adjusted accordingly. This payment
option will pay the loan
off based on a 30 year amortization.
The interest
only option is not available every month. This option is
only available when the
minimum payment
does not
cover all of the interest charge that month.
10/30
YEAR INTEREST ONLY ARM
* The initial payments are interest
only for the first 10 years.
* After the completion of the interest
only period, the unpaid balance is
fully amortized
over the
remaining term of the
loan.
* The Borrower may make voluntary
principal payments during the interest
only period.
The required
interest only payment
will be reduced to reflect the decrease
in the principal unpaid balance.
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