1. If you look at your monthly mortgage statement you will see that the principle balance on your mortgage probably only dropped a couple dollars while the majority of your payment was interest. As an example on a $150k loan at 6% your monthly payment is about $900. $750 goes to interest and $150 goes towards the principle balance. These numbers slowly start changing where more goes towards the balance and less to the interest but that’s around year 15 when that starts happening.
2. Mortgages are front loaded with interest. This means you pay the interest off first before the balance. It sucks but that’s how the banks get paid.
3. Most normal 30 year fixed loans should be considered interest only loans anyways. As you can see from the example above the majority of your payment is interest.
4. Never take out a interest only adjustable mortgage. You never know if you are going to be able to sell your home or be able to make the new interest only payment when your interest rate adjusts.
5. Always take out a 30 Year Fixed rate interest only loan if you are going to take out an interest only loan. How these loans work is that the interest rate is fixed for all 30 years of the loan. During the first 10 years of the loan you have an interest only option period. What this means is that all you are required to make a payment of is just the interest. After the 10 years the loan will turn into a 20 year fixed loan and you are required to start paying down the balance.
6. What most people get confused about is when they hear interest only mortgage they blame the mortgage company for never letting them pay it off or you never build equity. These are just misinformed people. A mortgage is just like any other bill, if you want to pay it off faster just write bigger checks every month and the balance will go down.
7. Interest only loans come with interest rates that are typically .25% higher than a normal 30 year fixed loan. The reason is because now the bank is not getting the principle balance you would normally be paying so they have to make it up some place else. Ask your lender what the difference in costs would be to get the same available interest rate as the 30 year fixed. It might cost a little bit more because you would be “buying down the rate”.
8. The best benefit of the interest only mortgage is the interest only payment. When you get your bill you can throw additional money on top of the payment or not. Its up to you. The biggest reason people refinance their homes is to lower their payments. So instead of throwing that additional $200 towards the balance this month just keep it in your pocket. After 3 months that’s $600 in your pocket and you do not have to pay thousands of dollars to refinance your loan to take cash out.
9. The absolute best part about the interest only loan is that your monthly payment will recalculate when you put more money towards your payment. As an example we have the same $150k loan at 6%: Your principle and interest payment will be $900 until the day you pay it off regardless if you put $75k on the loan. Sure, you just knocked off half of the time but the same amount of interest is calculated. With a interest only loan it recalculates. I’ll do the math but by using a interest only mortgage calculator you take the same $150k loan at 6% has an interest only payment of $750 a month for the first 10 years and at the end of year 10 turns into the 20 year loan and your payment is now $1075 a month. This is quite a big jump of about $325. Lets say at year 5 you put $75k towards you loan. Your new balance is $75k. Your interest only payment the next month will now be calculated at $75k loan at 6% with a monthly payment of $375. As you can see your monthly required payment dropped $750-$375=$375. If you just make the $375 payment a month at year 10 you will still owe $75k. Your payment will now be $538.
10. The interest only mortgage gives the borrower security in a fixed rate mortgage, the option to pay down their mortgage, and be able to see their payments slowly drop with it. What most smart borrowers do is make what their normal 30 year fixed principle and interest payment would be so their payment would not change in ten years at all.