Interest Only Mortgage

An interest only mortgage offers the homeowner the opportunity to make a lower than customary monthly mortgage payment.  As tempting as this may sound, one needs to be very careful when examining these options and as to avoid the potential pit falls that have recently been credited to the escalation in mortgage foreclosures.  The interest only mortgage certainly does have advantages if, and only if properly implemented.  Contact one of our local mortgage professional to determine if an interest only mortgage may be the right choice for you.

Recently adjustable rate mortgages have been recast to reflect a two – three point increase in the interest rate.  The above example set at a 4.000% rate if reset to say 7.000% demands a monthly payment of $1,750.  That represents a monthly savings of $245.91.

Unfortunately, unless the adjustments have capped out, the rate may continue to rise.  If economic conditions drove, the rate to 9.500% the new payment would be $2,375.00 or $379.09 more than the 30 year fixed mortgage would have cost.  Timing is critical when selecting an interest only mortgage.

• $ 300,000     loan amount
•        4.000%  interest rate
• $  12,000     annual interest charge
• _____________
• Divide annual interest charge by 12
• $    1,000     monthly payment

In comparison, a $300,000 loan at say 7.000% interest amortized over 30 years would yield a monthly payment of $1,995.91.  At first glance, the monthly savings of $995.91 appears attractive.

The 7.000% is fixed over the 30-year repayment period.  Your monthly principle and interest payments will never fluctuate.  The interest only mortgage on the other hand is an adjustable rate, which may generate extreme variations of potential payment amounts during the adjustment period.