What Is an Interest-Only Mortgage?

If selling a home and buying a new one is on the horizon for you and you’re thinking about getting an interest-only mortgage, keep reading. Toda’s blog will showcase just what an interest-only mortgage entails and if it’s the right option.

An Interest-Only Mortgage

Interest-only mortgages include payments that don’t contain principal. For instance, if you get a $200,000 loan with an interest rate of 6.5 percent, the loan payments would be $1,254 monthly, which contains both interest and principal. If just interest, it would be $1,083, which saves the homeowner $170 a month. The most common interest-only mortgages only allow borrowers to make interest-only payments for a limited time, which is about the first five or ten years of the loan. This means the payments after, move to an amortized (process of spreading out a loan into a series of fixed payments) amount.

The two most popular types of interest-only mortgages consist of:

  • A 30-year loan: option to make interest-only payments for the first 60 months or five years. 
  • A 40-year loan: option to make payments for interest-only for the first 120 months or ten years.

Who Benefits from Interest-Only Mortgages?

If you’re a first-time homebuyer, this could be a beneficial option for you. Many new homeowners struggle with ownership for the first year or two since they’re not used to paying mortgage payments, which are usually higher than rental payments. However, just because you get this type of loan doesn’t mean you have to follow the interest-only payment structure. This is only an OPTION during the early years of your loan. 

For example, if your roof needs repairing, this loan allows you to pay only interest for that month or two, so you have money to pay for repairs. Those whose income also fluctuate because of earning commissions, instead of a flat salary, can benefit from an interest-only mortgage loan. They can pay the lower amount during slim months and pay extra toward the principal when commissions or bonuses arrive.

Cost of Interest-Only Loans

It’s important to keep in mind that lenders rarely do anything for free so that an interest-only loan may cost more than a conventional loan. (6.5% versus 6.0%) Lender fees vary, so shop around. Another cost (not monetary) of getting this type of loan is the risk of being forced to sell the property if it hasn’t appreciated. If a borrower pays interest only every month, at the end of five years, for example, they will owe the original loan balance because the monthly payments didn’t go to the principal to pay down the loan. Even an amortized payment schedule will normally not pay down enough of a 100 percent financed loan to cover costs if the home hasn’t appreciated. Putting down a larger payment at the time of purchase reduces these risks, so consider that when weighing your options. If property values fall, the property’s received equity at the time of purchase can also disappear, regardless of whether the loan is amortized in a falling market.

Need to Sell Quickly?

Whether you decide on an interest-only loan or not, if you need to sell your property quickly, look to Fast Oklahoma House Buyers. We sell homes as-is and can often get you cash-in-hand soon. We charge zero fees or commissions and allow you to choose the closing date. We service Oklahoma County and Tulsa, Oklahoma, so contact us for more information.

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