Interest Only

“Interest only” mortgages are mortgages designed to keep your payments lower, often enabling you to qualify for more home loans.  These options are particularly favorable towards individuals with limited or lower income or first time home buyers, because there is often a payment shock generated among individuals who are trying to buy their first home. 

These particular loans can be linked to Adjustable Rate Mortgages and Fixed Rate Mortgages; regardless of the mortgage type, a principle and interest period will occur sometime during the loan’s repayment period.  When the adjustment takes place and principle is added, the amount the payment increases will depend on the number of payments remaining in the loan program. 

For example, a popular interest only loan will be the 30 year fixed rate with the interest only option.  After 10 years of paying only interest, the principle repayment option is then instigated, at which point the principle and interest payment reflects a 20 year mortgage term.  This is due to the fact that the loan only has 20 years remaining on the full repayment requirements agreed upon by the borrower.

If someone elects to enter into an interest only loan, based on their current circumstances, and later on find that their circumstances have changed, they can proceed with a principle payment on the loan.  You can simply add any incremental amount to the interest only portion of the loan and then have that amount applied to the principle.  Once the reset takes place you new payment will only reflect what is still owed on the loan.

Finally, it is important to remember that with an interest only loan you do not pay any of the actual principle on your loan; this means that your loan amount will not decrease as you make payments.  Instead, you will owe exactly what you borrowed each and every month.  The only time you will see principle reduction of your loan is when you pay more towards your payments or after the reset takes place.