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What are Interest Only Loans?

An interest only mortgage is a relatively new way to finance your home that has been gaining strong momentum lately. When you originally take out a mortgage your payment consists of two parts: interest and the principal. The principal is how much your house actually costs and the interest is how much extra you pay on top of the cost of your house to take out the loan, which is based on the interest rate you receive. The interest is basically the price of taking out a mortgage. You will pay both the interest and the principal based on an amortization schedule in which at the beginning most of your payment will be interest and towards the end most of your payment will be principal.

Interest Only?

An interest only mortgage takes out your premium payments for certain length of the loan. This usually happens at the beginning and lasts about five years. The first five years of your mortgage you will only pay the interest on your mortgage. Once those five years are up your mortgage will be re-amortized to include the principal on your mortgage. What is the point of this? For the first five years of your mortgage your monthly payment will be much less then it would be with a normal mortgage. Once those five years are up your monthly payment will be higher for the remainder of your mortgage. This is a good option for people who don't have a lot of money now but could see themselves getting more money via raise or investments in the future.

A Gamble?

Deciding on an interest only mortgage can be gamble because if you do not receive a raise in income like you expected after a few years then you could be stuck looking at high monthly mortgage payments after your initial few years of interest only payments has come up. Hopefully the money you saved during your interest only payments was managed wisely and you won't have this problem. An interest only mortgage basically comes down to whether or not you want to save some money at the outset of your mortgage.

Additional Resources

National Rate Averages

Mortgage Rates

Product Rate
5/1 yr ARM 3.147%
1 yr ARM 3.299%
15 yr fixed 3.221%
30 yr fixed 3.815%

Home Equity Rates

* Updated Jun 7, 2012