Interest-Only Mortgages:
What You Need To Know
- October 20, 2022
If you’re a potential homebuyer, this is an exciting time in your life! Between navigating the pros and cons of potential homeownership, and learning all you can about home loans and what to expect, costs can add up quickly before you even realize it.
Enter: interest-only mortgage payments. Simply put, an interest-only mortgage payment is when the borrower only pays interest on their monthly payments for the first several years of the home loan. This can help save a borrower up front, as they will have lower monthly payments at the beginning of their loan.
Then, when the predetermined period ends, the borrower begins paying the principal of their loan or sometimes pays a lump sum at a specific date or in subsequent payments.
Key Takeaways on How Interest-Only Mortgages Work:
- As a borrower, you have lower initial monthly payments because you are only paying the interest on your mortgage loan, not the principal and interest
- Interest-only mortgages only allow you to have lower monthly payments for a certain period of time
- Interest-only mortgages are typically structured as a specific, adjustable-rate mortgage determined by your lender
- This type of mortgage does not build home equity, which is a benefit of homeownership. Additionally, your monthly payments are only lower during the predetermined period of time and you will see significant payment increases when the principal is again factored into your mortgage loan.
The Details on
Interest-Only Mortgages
When deciding on whether or not an interest-only mortgage is right for you, it’s important first to speak with a lender to see if you are qualified as a homebuyer. A majority of these types of loan work on a set schedule where the homeowner will make interest payments for typically five, seven, or ten years.
At this point, as predetermined by the mortgage lender, the loan payments will increase to include both interest and principal, and will go through amortization, meaning the loan term has converted to standard scheduling.
This type of loan is typically considered an adjustable-rate mortgage, as opposed to a fixed-rate mortgage, and the period within which the borrower makes interest-only payments is considered the introductory period.
Additionally, loan payment terms will vary depending on your current mortgage, but when you reach the end of the interest only payments, your amortizing loan resets to the current mortgage rate. With the principal payments now included, the previous lower rates can double or triple.
Homeowners can choose to refinance their loan, however interest rates may not be where you want them in the future.
Interest-Only Mortgage Requirements
With unconventional loans becoming more and more popular, potential homebuyers are straying away from conventional loans and exploring what their payment options are for their mortgages.
Much like any other type of loan, mortgage lenders first require solid documentation of a solid cash flow, credit score, and credit history. Your lender will use this information to determine whether or not you qualify, and it is important to know that FHA Loans, USDA and VA loans do not apply in conjunction with an interest-only mortgage. As with a conventional loan, your lender will also look at home values when determining the rates of your mortgage.
Majority of major lenders also require higher downpayments than a conventional loan, and interest repayment will be higher over time.
Qualifying Candidates Typically Have:
- A healthy credit score, over 700
- Assets and available cash flow for loan repayment
- Less than 36% debt-to-income ratio
- A downpayment of at least 15%, but this is variable depending on the lender
Check out your interest-only mortgage potential, and even your refinancing potential with helpful online mortgage calculators like this.
Mortgage Interest Rates
No two mortgages are alike, and there is extended flexibility for homebuyers needing to explore unconventional loan options when buying their home.
While traditional mortgage rates are comparable, interest-only mortgage rates are typically higher. Online mortgage calculators can be used to enter your loan amount, and get an expected number for your loan payments.
Who Should Shop for an Interest-Only Mortgage?
While lower monthly payments upfront might sound like a great deal, it is important to thoroughly research and understand what options are right for you. There are pros and cons to each type of mortgage, and only an experienced lender can help you decide exactly what is best for your homebuying journey.
Who Should Shop for an Interest-Only Mortgage?
While lower monthly payments upfront might sound like a great deal, it is important to thoroughly research and understand what options are right for you. There are pros and cons to each type of mortgage, and only an experienced lender can help you decide exactly what is best for your homebuying journey.
Potential candidates for an interest-only mortgage should consider:
- Is it a high priority for you to have a lower initial monthly payment?
- Is building home equity not a top priority?
- You’re more interested in investing your money elsewhere, even potentially in real estate
- Your cash flow is sufficient, but not the best and you anticipate advancing your income in later years
- You can afford to take out a jumbo loan, but know that you will have more money further down the line
- You know that you also want a home equity line of credit to do repairs or renovations on your home
There are many things to consider when investing in a mortgage, and for some buyers, its not the right choice to pay interest only in the beginning! But, with a knowledgeable lender they will be able to help you make the right decision.
Choose
Delmar Mortgage
At Delmar Mortgage, we’re licensed in 36 different states and have decades worth of experience to back up our work. From new buyers to experienced buyers, and everyone in between, we work with each unique financial situation to help our buyers get the best opportunities.
We put our clients at the center of our business, and value the lifelong connections we create with homebuyers.
Learn more online about our services, and get in touch with one of our expert lenders near you to jumpstart your homebuying process today.
- Home Loan Options
- Oct 20, 2022
