Our ultimate guide for first-time homebuyers gives an overview of the process from start to finish. And from applying for a loan to managing your mortgage, Chase MyHome has everything you need. Finally, just because interest-only loans enable you to buy a more expensive home does not mean that you can afford it.

• Others may plan on refinancing, but if interest rates rise, they can’t afford to refinance, either.
• After this initial phase, with our interest-only loan example, the payment would rise to $2,033 per month — assuming your rate doesn’t change.
• Under the Dodd-Frank Act, a federal law passed in 2010 to protect against a repeat of the 2008 housing-market meltdown, buyers must meet certain standards to qualify.
• Even if this is the case, an interest-only loan is still worthy of consideration.
• You’ll also want to check if the lender offers flexible repayment options, like monthly or biweekly payments or the option to adjust your due date to better fit your budget.

Meanwhile, Chase Bank stood out for its flexible down payment options. Similar to most lenders, Chase Bank offers interest-only mortgages to eligible borrowers with a minimum credit score of 620 and a minimum down payment of 3%. Further, the company offers a wide https://turbo-tax.org/ range of mortgage terms and a number of educational resources to support their borrowers through the home-buying process. Interest-only mortgages reduce the required monthly payment for a mortgage borrower by excluding the principal portion from a payment.

Disadvantages of an Interest-Only Mortgage

Since new federal consumer-protection guidelines took effect in 2013, lenders know what sort of loans they can offer and to whom. Interest-only loans have been harder to come by since the housing crisis of the mid-2000s.. Fewer lenders offer them, and banks have set stricter requirements to qualify. This was one of the risky practices that contributed to the housing crisis in 2007, leading to the Great Recession. Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first.

• Keep in mind that payments towards your principal are inevitable down the line.
• The payment rises because interest rates are rising and because you did
  not pay down the principal during the first 5 years.
• Notably, 15/15 ARMs adjust once after 15 years and then remain fixed for the remainder of the loan.
• Most interest-only mortgages require only the interest payments for a specified time period—typically five, seven, or 10 years.
• If you want to uncover more about the best mortgage lenders for low rates and fees, our experts have created a shortlist of the top mortgage companies.

After that, your monthly payment will increase–even if interest rates
stay the same–because you must pay back the principal as well as the interest. For example, if you take out a 30-year mortgage loan
with https://online-accounting.net/ a 5-year I-O payment period, you can pay only interest for 5 years and then both principal and interest over the next 25 years. Because you begin to pay back the principal, your payments increase after year 5.

Can I Pay Principal During the Interest-Only Period?

During the first 10 years, the borrower could use as much of the credit line as desired, only paying interest on the balance due. After 10 years, the credit line is frozen, and the balance is paid off during the remaining 20 years. If that sounds too good to be true, just wait for the rest of the truth. After the introductory, interest-only term, the borrower must begin paying down the principal, which has not been reduced by a penny. Not only that, but the interest is still being charged based upon the full amount of the principal, and many loans include an adjustment that could raise the interest rate. So, the monthly payment will balloon to a significantly higher amount, which can be difficult for the borrower to pay.

What Is an Interest-Only ARM?

We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. For example, an interest-only mortgage could be a good fit for someone who earns large annual bonuses at work and uses those to pay down the principal. The qualifications for these loans aren’t standardized and can vary widely from lender to lender. Overall caps, which limit the interest-rate increase over the life of the loan. Read the terms of an interest-only loan closely and make a sound plan for the duration of the loan.

You’re now leaving Chase

However, our top-rated lenders may not be the best fit for all borrowers. The average APR for a 24-month personal loan is currently 11.48%, according to the most recent Federal Reserve data. Anything below this average would be considered a good APR on a personal loan. Rates will vary based on your credit score, financial stability, the lender you choose and your loan terms.

If you have a 30-year
loan and you are at the end of year 5, your payment will be recalculated for the remaining 25 years. If your loan balance has increased, or if interest rates have risen
faster than your payments, your payments could go up a lot. With a 30-year fixed-rate interest-only loan, you might pay interest only for 10 years, then pay interest plus principal for the remaining 20 years.

Borrowers who pursue interest-only mortgages do so for a variety of reasons. “Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises https://simple-accounting.org/ a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.

What are the alternatives to I-O mortgage payments and payment-option ARMs?

Interest-only loans are also called exotic loans and exotic mortgages. Sometimes they are called subprime loans even though they weren’t only targeted to those with subprime credit scores. This handy guide will help you decide exactly how much of your income you can reasonably dedicate to mortgage payments every month. What you may not realize is how little of your initial payments go directly toward paying off your loan.