What Is an Interest-Only Fixed Mortgage?
An interest-only mortgage is an option for a home buyer looking for a lower initial monthly payment. A fixed-rate loan has a set interest rate for the life of the mortgage, typically 30 years. An interest-only fixed rate mortgage combines the features of both mortgage options.
Other People Are Reading
-
Interest Only
-
The standard amortizing mortgage's monthly payment includes interest and principal. An interest-only loan payment consists entirely of interest, with no pay-down of the principal. The interest-only period is limited to the first five to 10 years, then the payments will be adjusted and the loan will start amortizing.
Interest-Only Costs
-
Mortgage lenders usually charge a higher interest rate for a loan with an interest-only period compared to a fully amortizing loan. The lender perceives a higher risk on the loan because the principal balance is not declining. For example, in January 2011, Bank of America quoted 4.75 percent for a standard 30-year fixed-rate mortgage and 5.375 percent for a 30-year, fixed-rate, interest-only loan.
-
Savings Example
-
Using those Bank of America rates, a home buyer financing a $200,000 loan would have a monthly loan payment of $1,043 with a fully amortized loan at 4.75 percent. The payment on an interest-only loan at 5.375 percent is $896.
Temporary Interest Only
-
All interest-only, fixed-rate loans are interest-only for a set period. When the interest-only period runs out, the payment will change to pay off the loan in the remaining term. The home buyer must be prepared to sell the home before the payment increases or be able to afford the larger payment. In the example loan, if the interest-only feature stops after five years, the payment will increase to $1,213 for the remainder of the term.
-
References
- Photo Credit silver bevel symbol percentage image by PaulPaladin from Fotolia.com
