All about interest only mortgage loans.

An interest only loan does not mean you will never pay principal on a home loan. These mortgage
programs have what's known as an interest-only payment option attached to the note. In all cases, the
note will state how long your interest-only payments will last. Let's use a 5 year interest-only loan for
example. On a typical 5 year fixed rate under an interest-only program, the interest rate is fixed for the
first five (5) years of the loan term, and your only obligation are interest-only payments during this term.
During the beginning of the 6th year (month 61), the unpaid balance is fully amortized over the
remaining term, and the borrower is now obligated to make principal and interest payments to the
lender.

Q: After the interest-only period, what will my rate be?

Although your loan will be subject to future market rates, your margin will not change throughout the
remaining term of the loan. Your interest rate will adjust regularly (usually on an annual basis)
according to the original terms of the interest-only mortgage note. Let's say your note called for your
interest rate to be determined by adding the current libor rate + a margin of 2.25. If the libor rate is
2.00% during month 61 you will have a new interest rate of 4.25% until the next adjustment period. It's
important to remember that these are now principal and interest payments, so your payment may be
higher even if your interest rate is low.

Negative Amortization

There is a common misperception that all interest only loans have a feature called negative
amortization. If you think this then you need to keep reading, because most interest-only loan programs
that are available with short term fixed rates DO NOT have negative amortization.

Many loan consultants are learning interest-only programs for the very first time, and one of the most
popular programs over the past few years has been what's known as the COFI or 12 MAT loan. These
loans are advertised with rates as low as 1.25%, and many of the lending professionals that sell these
loans do not realize they are not the same as a pure interest -only loan. First of all, these loans contain
the possibility of negative amortization (which common libor and treasury index loans almost never do),
and if you are financing above 80% of the value of your home, it is almost impossible to secure a
second mortgage or home equity loan. If you do, your rate will be something which will make you think
about reconsidering your first mortgage.

If you hear a loan consultant explaining a program with a rate that's too good to be true, and he
explains how you have four payment options... this is not the interest only loan you've heard your
friends talk about. It's a 12 MAT or COFI loan which may have negative amortization.

Ideal candidates for interest only loans.

Interest only loans can provide a great option for many homebuyers such as:

Skilled Investors: Borrowers who generally do not wish to tie up the equity in their home, and
would prefer to invest the extra money into markets of better return.

Upwardly Mobile Buyers: Borrowers who are sure their income will grow, but would like
greater purchasing power today. For example, young lawyers & doctors

Short Term Buyers: Borrowers who know the time frame for home ownership is within a
certain window of time, and are more concerned with payments than equity.

Real Estate Investors: Borrowers purchasing investment property find interest only loans very
valuable in areas where real estate appreciation is high.

This is not to say that an interest-only loan may not be right for you, but every program has a certain
profile of consumers that tend to show the majority of interest. If you think an interest-only loan can
benefit your life, it would be a good idea to consult with your financial advisor to make the best decision
for you and your family.