In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor. You can refinance after the interest-only period is over, although fees will likely apply.
Why would anyone want an interest-only mortgage?
We do not endorse the third-party or guarantee the accuracy of this third-party information. We’re the Consumer Financial Protection Bureau (CFPB), a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly. “The rate increase for the interest-only feature varies by lender and by day, but figure that you will pay at least a 0.25% premium in the interest rate,” Fleming says.
Interest-only loans aren’t necessarily bad, but they’re often used for the wrong reasons. If you have a sound strategy for using the extra money (and a plan for getting rid of the debt), they can work well. An interest-only mortgage is a loan with scheduled payments that require you to pay only the interest for a specified amount of time. Refinancing takes time and money, so it’s important to do it when you’ll get the most benefit out of the process. Though your initial payment will be smaller, the total interest paid will be higher than with a traditional mortgage. If you’re looking to buy a second home, you may want to consider an interest-only loan.
How interest-only mortgages work
In fact, many lenders may have even more stringent requirements for their interest-only loans than they do with standard, fixed-rate loans. These payments of principal and interest are going to be larger than the interest-only ones. And, because your principal payments are being amortized over only 20 years instead of 30, those payments will be higher than those of someone with a traditional 30-year loan. If you want a monthly payment on your mortgage that’s lower than what you can get on a fixed-rate loan, you might be enticed by an interest-only mortgage. By not making principal payments for several years at the beginning of your loan term, you’ll have better monthly cash flow. At the end of the interest-only mortgage term, the borrower has a few options.
An interest-only mortgage is a home loan that allows borrowers to make interest-only payments for a set amount of time, typically between seven and 10 years, at the start of a 30-year term. After this introductory period ends, the borrower pays principal and interest for the remainder of the loan at a variable interest rate. Most top 5 legal accounting software for modern law firms interest-only loans are structured as an adjustable-rate mortgage (ARM) and the ability to make interest-only payments can last up to 10 years. After this introductory period, you’ll start to repay both principal and interest. The interest rate on an ARM Loan can increase or decrease throughout the length of your loan, so when your rate adjusts, your payment will change too.
How Interest-Only Mortgages Are Structured
Since your loan balance won’t have gone down during the interest-only period, you’ll have a shorter time to pay it off, and your payments will be higher. For example, say you pay only interest for the first 10 years and your loan is a 30-year fixed-rate loan. You’ll pay down your principal balance for the last 20 years of your loan. Your payments will be higher because you’ll have 20 years to pay off the full balance, rather than 30 asset retirement obligation definition years.
- If your interest-only loan is an ARM, your payments will increase even more if interest rates increase, which is a safe bet in a low-rate environment.
- You pay just the interest, at a fixed rate, for a certain number of years, known as the introductory period.
- Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
- You’ll typically need at least a 640 credit score to qualify, though each lender is free to set their own minimum.
- The offers that appear on this site are from companies that compensate us.
An interest-only mortgage allows you to pay only the interest for a specified period, typically five to t0 years. After that, you’ll switch to principal-and-interest payments or repay the full balance all at once. You’ll probably need at least a 20% down payment to qualify for an interest-only loan. These loans tend to be riskier for lenders to take on, so the more you put down, the better. The biggest draw of an interest-only mortgage is that you’ll pay less each month than if you were putting money toward the principal.
Morgan offers investment education, expertise and a range of tools to help you reach your goals. Morgan Wealth Management Branch or check out our latest online investing offers, promotions, and coupons. Open a savings account or open a Certificate of Deposit (see interest rates) and start saving your money. Most house flipping loans are interest-only to maximize the money available for making improvements. Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester.
Some people buy a second home and eventually turn it into their primary home. Making payments towards just the interest may be convenient if you aren’t permanently living in the home yet. That means that if your rate goes up, your payment does, too — even if you’re still in the interest-only period. With an interest-only mortgage, you only make payments toward the interest, not the principal, each month. To find out what your payments might look like when the loan converts, use an amortization loan calculator that shows how your payments are broken into interest and principal. With an interest-only loan, your loan payments are only enough to cover the loan’s interest.
An interest-only mortgage may be the right home loan if you want to keep your housing costs low and are confident you’ll refinance or move before you have to pay both principal and interest costs. It could also be a good option if you don’t mind trading higher payments later for lower payments when you take out a home loan. However, you must be a well-qualified borrower to get an interest-only loan. An interest-only mortgage is a home loan that has very low payments for the first several years that only cover the interest owed — not the principal. These lower initial payments may last for as long as 10 years, but after that you’re required to start making payments toward the principal balance.
The offers that appear on this site are from companies that compensate us. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. It takes a long time to build equity with an interest-only mortgage, because you won’t make any progress on the principal owed for several years.
Chase online lets you manage your Chase accounts, view statements, monitor activity, pay bills or transfer funds securely from one central place. For questions or concerns, please contact Chase customer service or let us know about Chase complaints and feedback. View the Chase Community Reinvestment Act Public File for the bank’s latest CRA rating and other CRA-related information. Yes, you can refinance into another interest-only mortgage or a traditional mortgage.
If you want to avoid this higher-risk form of home financing, you can explore other types of mortgages. Many adjustable-rate mortgages also have a long, low-interest introductory rate period — and, since the payments include some principal, you’ll be building equity during it. With an interest-only loan, you pay only the interest on the loan, not the amount of the loan itself (also known as your “principal”).
Connect with a Chase Private Client Banker at your nearest Chase branch to learn about eligibility requirements and all available benefits. They can be beneficial for those needing a lower upfront payment or those looking to invest extra cash elsewhere. Fixed-rate interest-only mortgages are not very common; they usually exist on longer, 30-year mortgages. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. Our suite of security features can help you protect your info, money and give you peace of mind.