Mortgage versus Interest only Mortgage
With a fixed rate mortgage, your monthly payments will be steady.
Fixed rate mortgages are way more common and popular
than interest only mortgages for many reason. Once
reason why many people choose a fixed rate mortgage is
for the security in knowing that they have a fixed rate
for the life of their loan. Whereas with an interest
only mortgage chances are you are going to have to
refinance at least once to get to the point where you
are paying principal and interest mortgage payments in
order to hopefully someday pay off your mortgage loan in
full. Fixed rate mortgages are good for most people
while interest only mortgages are good for a few people.
An interest-only mortgage may be appealing to a homeowner who is paid on commission. Interest-only loans give you the option of making a minimum payment of only interest on the mortgage. It is smart to pay more than the interest-only payment so your balance decreases.
In contrast, with an adjustable rate mortgage (ARM) , your payments will vary over time.
Adjustable rate mortgages typically have an initial fixed rate lower than the rate of a comparable fixed rate mortgage. The initial fixed rate period is followed by adjustment intervals. For example, a "3/1 ARM" is fixed at an initial low rate for the first 3 years, and then adjusts every year based on an index. Common ARMs are: 1/1, 3/1, 5/1, 7/1, and 10/1. (Don't confuse ARMs and balloons )
The average homeowner in America sells or refinances roughly every 5 years. Keeping this in mind, it may not always be in your best interest to go with a fixed rate mortgage for 30 years. An ARM loan may be more appropriate for you, especially if you know you plan on moving or refinancing within the first few years. A 5/1 ARM will generally provide a lower interest rate than a 30 year fixed rate mortgage will and the lower rate will equate to a lower mortgage payment. So think about not just the now when obtaining a mortgage but the near future as well.
Interest Only is an option that can be chosen for most types of mortgages, Fixed or ARMs. The interest only option allows the borrower to make only interest payments. This is usually only allowed for the first 5-10 yrs. Choosing an interest only option can also affect your interest rate. There is usually an add on of 0.25% - 0.5% to the interest rate for interest only payments.
Interest only loans are available with both fixed rates and adjustable rate mortgages. Paying the interest only allows borrowers to lower their monthly mortgage payment.
With an Interest Only loan, you make no payments to principle. They only way to gain equity is to make additional higher payments or choose a home in a high appreciation area.
Just because you have an interest only mortgage doens't mean you can't pay towards the principle. Any amount of money you send in above the interest only payment will be used to decrease your loan balance and will decrease your interest only payment for the next month.
For borrowers seeking the lowest payments overall without sacrificing the predictability of a fixed rate, fixed rate or hybrid mortgages with interest only or minimum payment options are a popular choice. The minimum payment option is below the interest only payment, which allows the borrower to defer interest payments in exchange for the added cash flow, an excellent choice for some, but not all borrowers.
An interest only mortgage will save you money in the beginning but your payments will increase substantially when the interest only period expires. Interest only mortgages are great when one spouse leaves a career to raise a family or go to school, only to re enter the work force when the payments begin to adjust.
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Information listed above is to be used for educational purposes only and is not guaranteed
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