INTEREST ONLY LOANS

Find Out if You Qualify

What is an Interest Only Loan?

An interest only loan is a type of mortgage loan that only calculates the monthly interest payment on the principal balance. No principal reduction is made.

Benefits of Interest Only Loan?

  1. Maximize the value of your home purchase.
  2. Minimize your monthly payments.
  3. Option to pay principle.
  4. Flexibility to manage saving your own money.
  5. 3-year, 5-year, and 10-year fixed loan options

Disadvantages of Interest Only Loan?

Dangerous for borrowers who don’t realize their loan will convert to principal and interest at the end of fixed term resulting in high mortgage payment or the loan balloons which means the full amount of the principal balance is due.

Reality of Interest Only Loans?

This loan program is good for borrowers who can manage their finances and want to empower themselves to use the free cashflow to invest in other assets or save money. 

A Plus Mortgage Rates has a unique 10-year fixed interest only loan program that converts into a principal and interest loan at the end of the term which is nice. We call this a Smart Money loan, there is no need to refinance or come up with balloon payment.

What is an Interest Only Loan?

An interest only loan is a type of mortgage loan that only calculates the monthly interest payment on the principal balance. No principal reduction is made.

Benefits of Interest Only Loan?

  1. Maximize the value of your home purchase.
  2. Minimize your monthly payments.
  3. Option to pay principle.
  4. Flexibility to manage saving your own money.
  5. 3-year, 5-year, and 10-year fixed loan options

Disadvantages of Interest Only Loan?

Dangerous for borrowers who don’t realize their loan will convert to principal and interest at the end of fixed term resulting in high mortgage payment or the loan balloons which means the full amount of the principal balance is due.

Reality of Interest Only Loans?

This loan program is good for borrowers who can manage their finances and want to empower themselves to use the free cashflow to invest in other assets or save money. 

A Plus Mortgage Rates has a unique 10-year fixed interest only loan program that converts into a principal and interest loan at the end of the term which is nice. We call this a Smart Money loan, there is no need to refinance or come up with balloon payment.

Why would you get an interest only loan?

Getting an interest only loan is good because it enables borrowers to afford a more expensive house. The borrower must know that after the introductory fixed interest only period to be prepared for higher payments. After the interest only period, the loan amortizes to a principal and interest loan, therefore, a higher payment. Borrowers are usually making more money by time this happens or they sell the house before the period expires.

Interest only loans
interest only loans

 

Do interest only loans still exist?

Interest only loans still exist, and they are usually a fixed rate interest program. These loans make sense if you can lock them in for a long period of time. Mortgage rates are at an all time and if you lock in a 10-year fixed interest only that amortizes into a 40-year term after the fixed rate period is the best-case scenario.

Interest only loans, do banks offer them?

Yes, a handful of private banks and lenders offer interest only loans. Borrowers with significant assets and can demonstrate the ability to afford larger payments after the interest only period are more likely to get approved.

How to qualify for an interest only loan?

Interest only loans are good for borrowers who have a high FICO score, usually over 720, strong income and down payment. Lenders may require additional assets such as reserves up to 12 months of principal and interest payments to qualify. In addition, the borrower must have a low debt to income ratio, usually below 43%.

Is getting an interest only loan a good idea?

From the outset, an interest only loan looks appetizing because of the lower payment. It allows borrowers to purchase a bigger home and live a better life. Borrowers who plan properly can take advantage of the lower monthly mortgage payment. Borrowers should be prepared for a higher monthly payment after the initial interest only period, otherwise, they can be in for a real surprise.

How long can an interest only period last?

Interest only periods depend on the lender. Some lenders offer fixed rate interest only mortgages for 5 years sometimes even 10 years. This period is when the borrower will enjoy lower monthly mortgage payments. After the initial period, the loan will amortize into a principal and interest loan increasing the monthly payment significantly.

Can you pay an interest only loan early?

Interest only loans can be paid early depending on the program your lender approved you for. Typically, there’s a 2-year or 3-year prepayment penalty. In some cases, borrowers can pay a higher interest only rate to eliminate the prepayment penalty. Be sure and check with your lender and their guidelines before proceeding with any type of loan to check for prepayment penalties.

Can you refinance an interest only loan?

Yes, you can refinance an interest only loan at any time, but some lenders require you hold the loan for a minimum of 1 year. Additionally, prepayment penalties may apply and must be considered before refinancing. You can refinance into a traditional principal and interest loan or refinance back into another interest only loan should you meet the lenders requirements.

How much can I borrow interest only?

It really depends on the lender. Some lenders allow you to borrow up to 75% Loan to Value. The average we’ve seen in the market is 60% LTV. With a higher loan to value, there’s usually a higher interest rate. Some lenders may go up to 80% depending on the state and lender requirements.

Why do investors get interest only loans?

Investors get interest only loans to maximize their cashflow when they rent the properties out. The disadvantage to this is the investor does not reduce their principal loan amount, however, investors typically rely on the sale of another property in their portfolio and use the proceeds to pay down another mortgage and refinance it.

Is interest only loans tax deductible?

Investors like to borrow interest only on properties and plan to sell at the end of the term. At this point taxes on capital gains are due. The cost of the mortgage meaning the interest only aspect of it is tax deductible. For example, if you have a mortgage of $1,000,000 and the monthly interest payment is $5,000 per month, then the $5,000 per month is tax deductible.

What should you do when interest only period is over?

Interest only periods last for 5 years sometimes 10 years. When the interest only period is over, the best move depends on your financial plan. In some cases, it’s best to refinance into another interest only loan. In other cases, it’s best to go into a long term 30-year fixed mortgage or a 15-year fixed mortgage. The last option is to exit out of the property and sell move onto a new property. 

Interest-only loans explained by our home loan expert – YouTube

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