The mortgage industry has evolved greatly over the past 40 years. There was a time when you only option was a fixed rate mortgage. The interest rate and mortgage program was what ever your local bank had available. Then came the 1 Year Adjustable Rate Mortgage.
As the mortgage industry has evolved coupled with the explosive growth of the real estate market the demand for new
and innovative financing products continues. The latest "hot" product is the interest only mortgage.
Interest only home loans offer buyers greater purchasing power,
increased cash flow and usually more liberal underwriting guidelines.
The product is clearly not designed for everyone. The interest only option for the adjustable rate mortgage can be extremely beneficial to the borrower for whom these mortgages are tailored. The mortgage market has a number of programs available to borrowers. We have composed a brief list of some of the products currently available. PLEASE REMEMBER, get the program specifics from any Lender, Banker, or Broker before you place an application. Two lenders might have a very similar program, but the details of the program might differ radically.
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1 MONTH ARM - INTEREST ONLY
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Theses mortgages are usually tied to the LIBOR Index. The interest rate on this loan is calculated by adding the current monthly index rate plus the your specific margin. When you compare lenders you need to know the margin more than the start rate. The start rate will only remain constant for one month. The margin will not change throughout the term of the loan. The index value will be adjusted every month. As the LIBOR Index adjusts your interest rate will be adjusted.
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1 & 3 MONTH OPTION ARM - MTA, LIBOR, CMT, COFI, COSI, CODI
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You NEED TO fully understand these loans before you consider them. They have very flexible underwriting guidelines. You will see these loans advertised as 1% - 2.45%.
This is not the interest rate but the "minimum monthly payment". The mortgage payments for the first 12 months will be calculated and fixed for 12 months by the "minimum monthly payment". The "minimum monthly payment" will increase 7.5% per year.
The interest rate on this loan is completely independent from the "minimum monthly payment". The interest rate will adjust monthly after the initial period (1 or 3 months). Should the index that the loan is tied to increase rapidly the loan has a potential for Negative Amortization. Negative Amortization in when your payments fail to meet a level sufficient to cover a minimum interest payment. If you continued to have the negative amortization you could have a situation where you owe more money than you originally borrowed. Most of these loans have clauses that forbid the borrower from exceeding 110% - 125% of the original loan amount.
These option ARM's also have an interest only feature, however the interest only feature only applies when the fully indexed (margin plus index) interest only exceeds the "minimum monthly payment". The borrower will receive a monthly statement that details the payment options as they become available.
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6 MONTH ARM - INTEREST ONLY OPTION
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Theses mortgages are usually tied to the LIBOR Index. The interest rate on this loan is calculated by adding the current monthly index rate plus your specific margin. When you compare lenders you need to know the margin more than the start rate. The start rate will only remain constant for six months. The margin will not change throughout the term of the loan. The interest rate will be re-calculated every six months. The re-calculation will cause the interest rate to adjust every six months.
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3 YEAR ARM - INTEREST ONLY OPTION
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The interest rate is fixed for the first three years of the loan term. During years 4 thru 30 the interest rate is adjusted every year based upon the margin plus the index. The margin will not change throughout the term of the loan. Some 3 Year ARM Programs are interest only for only the first 3 years while other programs extend the interest only option for the first five years of the loan. The borrower is required in Years 4 thru 30 or 6 thru 30 to make fully amortizing principal and interest payments based upon the remaining term of the loan.
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5 YEAR ARM - INTEREST ONLY OPTION
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The interest rate is fixed for the first five years of the loan term. During years 6 thru 30 the interest rate is adjusted every year based upon the margin plus the index. The margin will not change throughout the term of the loan. Some 5 Year ARM Programs are interest only for only the first 5 years while other programs extend the interest only option for the first ten years of the loan. The borrower is required in Years 6 thru 30 or 11 thru 30 to make fully amortizing principal and interest payments based upon the remaining term of the loan.
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7 YEAR ARM - INTEREST ONLY OPTION
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The interest rate is fixed for the first seven years of the loan term. During years 8 thru 30 the interest rate is adjusted every year based upon the margin plus the index. The margin will not change throughout the term of the loan. Some 7 Year ARM Programs are interest only for only the first 7 years while other programs extend the interest only option for the first ten years of the loan. The borrower is required in Years 8 thru 30 or 10 thru 30 to make fully amortizing principal and interest payments based upon the remaining term of the loan.
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30 YEAR FIXED RATE - INTEREST ONLY OPTION
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The interest rate is fixed for the first ten years of the loan term. During years 11 thru 30 the loan becomes fully amortizing for the last 20 Years.
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