When you hear that Interest-Only loans may be making a little bit of a comeback, what is your initial reaction? Is it concern about the housing bubble bursting? Consumers making extremely misinformed decisions? If that is the case, I am sure your opinion is based on the interest-only loans of the early to mid-2000s. However, the interest-only loans of today are quite different from those of that time period. The main reason for the difference is that a person needs to qualify in a much more strict manner than with a fully-amortizing loan; in addition, the requirements for credit score, income and reserves are more intensely scrutinized than on other more traditional loan products.
An Interest-Only loan can be a good tool for some, but as with anything finance-related, it depends on your goals as well as your risk tolerance level. Traditionally, interest-only loans are fixed with an interest-only payment for a set number of years (3, 5, 7 or 10), and then adjust to a fully-amortizing payment, based on a new rate, after that fixed term. One’s goal is to refinance or sell the home prior to entering the adjustment period.
However, there is now a new available program that eliminates the risk of what happens after the initial fixed term is complete. The program is a 40-Year Interest-Only loan. This loan has a fixed rate, with interest-only payments due in the 1st 10 years. After 10 years, the rate remains fixed at the same rate, but becomes fully amortizing (principal & interest payments due) over a 30-year period.
Why is this good?
- Firstly, it allows for greater cash-flow opportunities in those first 10 years
- Secondly, it offers the benefit of knowing what your interest rate and mortgage payment will be in 10 years
The downside to this loan, as with any interest-only, is:
- the interest rate is higher than a traditional current fixed rate mortgage
- you will pay more in interest over the life of the loan
- it will take longer to build equity in your home
It’s good to know there are options out there, but again, it does depend on your goals and your risk tolerance. If you have any questions, comments or would like a rate quote, reach out to me at email@example.com or 408-337-9160.