Interest Only Mortgage Rates

In an interest only mortgage loan you have an interest only payment option attached to it in the contract note. You only pay the interest on the mortgage that is stated in the note for a fixed period of time.

For example, if you have taken an interest only mortgage loan for 5 years you only pay the interest on your mortgage for 5 years. After the completion of 5 years the unpaid balance is fully amortized over the rest of the period by paying the interest and the principal to the loan company. It then turns into a regular long-term mortgage loan where you have to pay the interest and the principal amount. The interest only mortgage rate is an adjustable rate determined by the current interest rate.

Interest only mortgage rates and interest payments

As stated above, you only make interest payments for a fixed period of time. During fixing of the terms, you have to state in the note the margin that will be added to the future interest rate after the fixed period is over. This preset margin will stay fixed throughout the remaining term of the loan while the interest only mortgage rate added to it will change (generally on an annual basis) with the fluctuation of the current index rate.

For example: You take a 5-year interest only loan, and the interest payable will be the current interest rate plus the margin of 2.25%. Thus, after completion of 5 years, during month 61, if the current interest rate is 2.50%, you'll be paying 4.75% interest till there is a change in the current index rate. So after the interest only mortgage payment period is over you will be paying the adjusted interest only mortgage rate and the principal, which will increase your interest only mortgage payments.

Interest only mortgage payment does not mean negative amortization

Loan programs that have interest only mortgage rates are ones where you pay a fixed rate of interest for a fixed period of time. They do not contain any features of negative amortization, as there is no deferred interest during that fixed period. Option Arm and Cash Flow loan programs are two examples of home loans that carry negative amortization.

Interest only mortgage payment loans are generally not long term solutions

Typically interest only mortgage loans are short-term loans unless your risk profile is high. But these loans carrying interest only mortgage rates are a good opportunity for many wanting to buy homes. For instance:

• Individuals in high-income brackets - For consumers who want toinvest their money in the market and not lock it by purchasing property.They expect better returns from the markets than the returns on theproperty.
• Young professionals - Youngsters, who may have lower income at presentbut expect substantial increase in their income in the future, wouldlike to use their purchasing power by getting a home loan with interestonly mortgage rate. For example, lawyers, architects, doctors, etc.
• Short-term home owners - Consumers who take short term loans aremore concerned with payments than equity since they know that theycan pay off the loan within a short period of time. This profile prefersto go for a loan that has interest only mortgage rate.
• Investors in property - Consumers who take these interest only mortgageloans invest in real estate when they know that the capital appreciationin property is going to be faster than other investments.

An interest only mortgage loan can be taken by anybody, but it may be more beneficial to a certain profile of customers. If an interest only loan suits your needs discuss all the pros and cons with your financial consultant, and then go ahead and contact a mortgage lender for the loan.

Interest only loans for a fixed period of time

In an interest only loan your interest only mortgage payment is the same for a fixed period of time. It could be a 3,5,7 or 10 year interest only mortgage loan. For example: If you take a 5-year interest only mortgage loan, the interest only mortgage payments are made for the first 5 years only, after which your interest only mortgage payments will consist of the principal and the interest. The interest only mortgage rate will be computed by adding the current rate of interest and the pre-determined margin.