Question: |
What should I keep in mind when it comes to an interest-only mortgage payment or a payment-option ARM? |
Category: |
Business & Finance > Renting & Real Estate |
Keywords: |
interest-only, I-O, interest, only, payment, option, payment-option, mortgage, loan, ARM |
Type: |
what |
Rating: (0 ratings) Views: 393 Discussions: 0 In Watch Lists: 1 |
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Answer:
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- Both types of loans can be flexible and allow you to make lower monthly payments during the first few years of the loan. You can repay some of the principal at any time to help keep future payments lower.
- Neither loan may be the right choice if the attraction of an initial smaller monthly payment leads you to take out a larger mortgage than you will be able to afford when the interest-only period ends or when the option payments are recalculated.
- Eventually you will have to pay back the principal you borrowed, plus any amounts added to the principal as negative amortization.
- You will have lower monthly payments only during the first few years. You will have larger payments later--and you will need to have the income to cover those larger payments.
Also, note that
- with an adjustable-rate mortgage, interest-only and option-ARM monthly payments can increase, even during the I-O-payment or option period.
- by making I-O or minimum payments, you will not be building equity in your home by paying down the principal on the loan, even though you are making monthly payments. The equity in your home may increase if the market value of your home increases, but the equity could also go down if the market value of your home goes down.
- with payment-option ARMs, you may be adding to the amount you owe on your mortgage if you pay less than the full interest owed each month.
Important target dates in an I-O mortgage or a payment-option ARM
- Introductory period. Many option ARMs have a 1-month or 3-month introductory period at the beginning of the loan. During this period, lenders use a lower interest rate to calculate your payments. For some I-O mortgage payment loans, this introductory period lasts 1, 3, or 5 years.
- Interest rate adjustment period. Most payment-option ARMs have interest rates that adjust monthly after the introductory period. You could find that the interest you owe increases even though your minimum payment stays the same each month, adding to your negative amortization. Typical interest rate adjustment periods for an I-O mortgage are monthly, every 6 months, or once a year.
- Payment adjustments. Most I-O payment mortgages and payment-option ARMs have payments that adjust once a year. In addition, most of the adjustments on payment-option ARMs are limited by a payment cap, usually 7.5%. Keep in mind that payment caps do not apply when your loan is recalculated at the normal recalculation period. Payment caps also do not apply if your balance grows beyond 110% or 125% of your original mortgage amount.
- Recalculation period. With a payment-option ARM, your loan will be recalculated, or recast. The recalculation period is usually 5 years, but it can vary depending on the terms of your loan. When your loan is recalculated, the 7.5% payment cap does not apply, so you could see a large change in your monthly payment. After your loan is recalculated, you will still have the option to make a minimum payment. I-O loans are recalculated at the end of the option period (usually 3, 5, or 10 years); after that you will pay back both the principal and interest for the remaining term of the loan.
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What should I keep in mind when it comes to an interest-only mortgage payment or a payment-option ARM?
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