Are These Types Of Loans Widely Available
Since so many borrowers got in trouble with interest-only loans during the housing bubble years, banks are hesitant to offer the product today, says Yael Ishakis, vice president of FM Home Loans in Brooklyn, N.Y., and author of “The Complete Guide to Purchasing a Home.”
Fleming says most are jumbo, variable-rate loans with a fixed period of five, seven, or 10 years. A jumbo loan is a type of nonconforming loan. Unlike conforming loans, nonconforming loans arent usually eligible to be sold to government-sponsored enterprises, Fannie Mae and Freddie Macthe largest purchasers of conforming mortgages and a reason why conforming loans are so widely available.
When Fannie and Freddie buy loans from mortgage lenders, they make more money available for lenders to issue additional loans. Nonconforming loans like interest-only loans have a limited secondary mortgage market, so its harder to find an investor who wants to buy them. More lenders hang on to these loans and service them in-house, which means they have less money to make additional loans. Interest-only loans are therefore not as widely available. Even if an interest-only loan is not a jumbo loan, it is still considered nonconforming.
Because interest-only loans arent as widely available as, say, 30-year fixed-rate loans, the best way to find a good interest-only lender is through a reputable broker with a good network, because it will take some serious shopping to find and compare offers, Fleming says.
Year Interest Only Mortgages
These resemble conventional 30-year mortgages with a caveat: borrowers dont pay principal at the outset, usually for the first 10 years. Since the repayment period is the same as a standard 30-year loan, monthly principal payments in the final 20 years would be higher than they would if principal were paid from the beginning. Lenders generally want larger down payments and charge higher interest for these loans since they are considered risker than conventional loans.
What Youll Pay Each Month
Monthly payments depend on your interest rate and whether the interest rate adjusts during the repayment period or is locked at a fixed percentage of the balance. Its important to remember that during the no-interest period of the loan, your equity balance wont change, which means you will never pay less each much unless your interest rate adjusts lower.
Heres an example of how it works: You buy a $350,000 home and make a $150,000 down payment. You take a 30-year mortgage interest only loan that carries a 7% interest rate during the first 10 years. During the interest only period, the monthly payment will be $1,166.67, unless your interest rate adjusts. After that, you begin paying both interest and principal and the loan amortizes mortgage for the next 20 years.
A key difference between a conventional fixed and interest-only loans: Payments on a conventional loan is the same every month, but the amount of interest you pay, gradually falls and the principal portion increases as the loan is paid down. An interest-only loan payment is based on both the interest rate and the balance, so it can be variable. If the interest rate adjusts, or you make extra principal payments, the monthly payment can change. And, of course, when the interest-only period ends, the minimum monthly payment will jump.
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Does The Type Of Loan And Loan Payment Plan Make Much Difference
Yes. . . for both the growth of your investment in your home and the amount of your monthly payments during the term of the loan.
Equity growth. During the first few years of a traditional mortgage loan, most of your monthly payment goes to interest. The rest goes toward the principal, so that you start to build equity in your home through payments. Thus, the amount you owe declines and you own more of your home. If you make interest-only payments, you are not building equity. And if you make only the minimum payments with a payment-option ARM, you may actually be adding to the amount you owe because unpaid interest is added to the loans principal. For example, if you were to buy a $200,000 home with a 10% downpayment and a $180,000 mortgage, heres what your home equity might look like after 5 years with different kinds of loans.
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How Can I Find Out What Interest Only Mortgage I Can Afford
To start with, interest only mortgages require a larger deposit than repayment mortgages. Thats because lenders want to ease the risk of you not repaying the debt you owe until the terms end. Some lenders will ask for a deposit as large as 40%, but you may be able to lower this by comparing mortgage providers. Still, youll need a larger deposit, so keep this in mind before you start your search. In terms of the amount you can borrow, this depends on various things. Your salary is the main one, and you can usually borrow up to four times this amount. Lenders will also assess your monthly outgoings, to find out how much disposable income you have left each month. Next you have the . The lower this is, the lower the mortgage rates youll have access to. This is important, because this is the rate that will determine your monthly mortgage payments. The lower the rate, the cheaper your mortgage repayments will be, making it easier to afford. Finally, any potential mortgage lender will want to assess you, to understand whether you can afford both your monthly repayments, as well as the final balance at the end of your interest only mortgages term. For this, theyll want to see a plan, whether thats through savings, investments, or perhaps something else. If you cant produce a solid and realistic plan, they could turn you down.
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Get Matched With An Interest
Whatever your reason for choosing an interest-only mortgage, the brokers we work with are experts in this field, and can find the most suitable deal for your needs, and circumstances. As well as helping you to secure the best rates, they can ensure the lender accepts your chosen repayment vehicle, and help you prepare your application for a smooth transaction.
Our free broker matching service will introduce you to the most suitable broker, so contact us on 0808 189 2301 or via this form, and well get you started with a free, no-obligation chat.
How To Pay Off Your Interest Only Mortgage
Its very important that if youve already got an interest only mortgage, you have a plan in place so you can pay it off when the term ends.
Here are some examples of what your plan could involve:
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You could switch your mortgage to a repayment mortgage and start paying off some of the balance.
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You could make overpayments on your mortgage, as long as your mortgage conditions let you do so. Youd end up paying less interest and also paying off all or some of your balance. This mortgage overpayment calculator shows you how much youd save in interest.
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You could set up an investment plan, and use the capital to pay off your mortgage at the end of the term.
Its a good idea to make a plan now and take action, rather than wait until youre close to the end of your mortgage term.
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What Are The Cons Of Using An Interest
- If you dont pay on your principal during the initial interest-only period, you wont build equity in the property, though it may or may not increase in value with the market.
- Once the interest-only period expires, your monthly payment can go way up.
- While you could gain equity if your homes value increases , the opposite is true as well. If home prices plummet, you may owe more than your home is worth, which will work against you if you plan to refinance before the end of the interest-only term. You could be potentially be stuck with the house unless you can come up with the cash to make the difference between what you can sell the house for and the amount owed on the mortgage.
Learn more:
You Shouldnt Consider An Interest
You cant afford the full monthly payment: Eventually, youll have to make payments towards the principal and interest. Dont assume youll be earning enough income at that time. Budget for repayment based on the income you earn today.
You need down payment assistance: If you cant afford at least a 15% down payment, youll want to consider another type of home loan, such as an FHA loan.
Youre buying in an area where values are dropping: If home prices are depreciating, youll lose equity in your home and have difficulty with refinancing.
You want the most cost-effective mortgage: An interest-only loan is going to be more expensive to finance than a conventional mortgage. If your primary concern is spending the least over the life of the loan, choose another alternative.
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What Are The Alternatives To I
If you are not sure that an I-O mortgage payment or a payment-option ARM makes sense for you, there are several other alternatives you could consider.
Find out if you qualify for a community housing program that offers lower interest rates or reduced fees for first-time homebuyers, making homeownership more affordable.
Consider a fixed-rate mortgage or a fully amortizing ARM. Shop around for terms and features that fit your needs and your budget.
Take more time to save for a larger down payment, reducing the amount you need to borrow and making your mortgage payments more affordable.
Look for a less expensive home. Once you build up equity, you could buy a more expensive home.
Which Lender Will You Choose
Not all lenders provide interest-only mortgages so your options may be limited. Of those that do, you want to find the lender that will give you the best deal for somebody in your financial situation.
Searching the market for the appropriate lender can be time-consuming but that is where we come in. At YesCanDo Money, our mortgage experts have access to thousands of deals across the whole mortgage market and can help you save money by finding you the best mortgage deal and the most appropriate lender.
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What Should I Use For Buy To Let
The reason that interest-only mortgages are popular for buy to let, is because landlords themselves arent living in the property. Furthermore, rental income is usually enough to cover the mortgage. This is another reason why landlords often choose interest-only for their buy to let mortgages.
Learn more: Interest-only buy to let mortgages explained
Interest Only Mortgage Broker
If youre thinking about purchasing a property, then you may be considering an interest only mortgage, and its best to work with a specialist mortgage broker to help you find the best deal possible. There are a number of additional factors and criteria to consider, and it can be harder to arrange compared to a traditional repayment mortgage however, not impossible.
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Should I Switch If I Have An Interest
It may be worthwhile to switch to a repayment mortgage. This is so youre not left in a difficult position at the end of your mortgage term. That being said, if you have a repayment plan thats not set to change, then you can perhaps remain on your current mortgage without any issues.
If youre not confident with your repayment plan, then switching to a repayment mortgage can make perfect sense. This is because youll want to ensure each mortgage payment is paying both the interest and the mortgage balance. Doing so can also provide you with a sense of security.
You wont be left in a difficult position at the end of your mortgage term or have the pressure of having to pay the balance, as your monthly payments will essentially do this.
Your lender may also allow you to make overpayments towards the mortgage balance, even on an interest-only mortgage. You can therefore clear the balance much sooner than waiting for the term to expire. Each lender is different so youll have to check whether youll be able to do this.
Can You Pay Off An Interest Only Mortgage Early
If your financial situation changes, for example, your salary rises or you receive an inheritance, you might be interested in making overpayments, or even paying off your mortgage early. If youre in the middle of a mortgage deal, such as a fixed or discounted rate, you could face early repayment charges. This can be very expensive, because its usually a percentage of the outstanding mortgage loan amount. To avoid paying an early repayment charge, youll usually need to wait until the end of your fixed term. If this is too far away, then you might decide that paying the early repayment charge is worth it. The best thing to do is check the terms of your mortgage, to find out what your options are. If you need support or advice, consider talking to a mortgage adviser. Alternatively, you could consider switching from an interest only mortgage to a repayment mortgage plan. This will allow you to begin paying off the mortgage balance owed over the course of your mortgage term.
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There Are A Number Of Things You Can Do To Help Navigate The Mortgage Market Right Now
Its been a torrid week for the home loan market. If you have one and your term is coming to an end, or you are hoping to buy a property and feel panicked as you watch the rates go up, it has not been an easy time.
But help is at hand, in the form of these easy mortgage tips and tricks below. They will help you cope with the mortgage mayhem.
What Are Some Important Target Dates In An I
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.
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What Do You Need To Ask When Shopping For An I
Use the Mortgage Shopping Worksheet to compare different loan products. Ask lenders or brokers about the details of their loans and about the different loan options they offer. And don’t be afraid to make lenders and brokers compete with each other by letting them know you are shopping for the best deal. Look for a mortgage that allows you to buy the house and continue to afford the payments, even if payments go up over time.
What If I Cant Repay The Capital At The End Of The Term
If you fall short of the amount needed to cover the capital debt at the time it becomes payable, you may be given the following options:
Remortgage and pay the capital. Although switching to a repayment mortgage will mean paying out more each month, you could keep costs down by arranging to extend the term of the loan and ensuring you are on the best interest rate. However, you will need to prove affordability for the loan.
Use your pension. You can withdraw up to 25% of your pension tax-free when you hit age 55. As an example, thats £20,000 on a £80,000 pension pot, which might be sufficient to cover any shortfall.
Switch to a retirement interest-only mortgage . This type of mortgage also allows you to make monthly payments that cover solely the interest. But, unlike an interest-only deal, the capital is only repaid when you pass away or enter into long-term care and your home is sold.
Not all lenders offer ROIs however, and you will need to be aged at least 55 to qualify. Some lenders also impose an upper age limit of age say, 90.
Equity release plan. You could consider a lifetime mortgage. This is where you borrow a lump sum against your home and, while you continue to live there, no repayments are due on it.
Instead, the fixed interest rolls up, is added to the amount you borrowed and repaid in full when you die or go into long-term care and your property is sold.
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How Much Do I Have To Earn To Get An Interest
The total amount you can borrow will typically be a multiple of how much you earn. But getting an interest-only mortgage can depend on lots of factors, not just earnings. These can include the price of the property, how much you want to borrow, your individual circumstances and the lenders criteria.
