With every kind of mythical benefit known to man, some of the mortgage companies today, sell their mortgage packages from the belief that interest only is a real mortgage that will ultimately payout (slight of words, there) to the belief that an interest only mortgage contains a lower interest rate(which is does, but only for the short term). Let's move into the weird and unusual by starting with some of the more traditional loans.
In the last three to five years, there has been an incredible jump in the available interest only mortgage packages so maybe we should take a minute to break down some of these mortgages into a language everyone can understand.
10/30 Interest Only Mortgage
The 10/30 interest only mortgage works in the following way: With a fixed interest rate, you borrow money in the form of a 30 year mortgage. The first 10 years are interest only payments, with the full amount of the principal being amortized (interest payments included) over the last 20 years of the loan.
15/30 Interest Only Mortgage
The 15/30 interest only mortgage works in the following way: you borrow money in the form of a 30 year mortgage, with a fixed interest rate. The first 15 years are interest only payments, with the full amount of the principal being amortized (interest payments included) over the last 15 years of the loan.
For consumers with any kind of investment knowledge, these mortgages are really appealing. It would be one of these two, the 10 or 15 of 30 if I were going to borrower with the interest only mortgage option.
3/1 ARM
There's a 3/1 ARM. A 3 year ARM, signifies that the interest rate is locked in for 3 years. For the first month, the interest payment is only 1%, for the next 3 years following only the interest is due as the monthly payment. The interest rate will change, and the payments will begin to include principal and interest after the 3 year term, and for the remainder of the life of the loan, normally thirty years.
5/1 ARM
There's a 5/1 ARM. A 5 year ARM, means that the interest rate is locked in for 5 years. For the first month, the interest payment is only 1%, for the next 5 years following only the interest is due for the monthly payment.
The interest rate may change, and the payments will begin to include principal and interest after the 5 year term, and for the rest of the life of the mortgage, normally thirty years.
Since too many things can change before the 7 or 10 years is up, these mortgages also come in 7/1 and 10/1 ARMs, but analysts really don't advise extending the interest only option out that far.
Myth: Home Mortgage Income Tax Deduction Is A Considerable Benefit
Rather than this, what are the other myths can we find? There's the belief that the home mortgage income tax deduction is a considerable benefit to the taxpayer, and that 1% interest only loans are for the life of the loan! Ha! There's also the balloon note myth that propagates the belief you can automatically refinance by means of your current lender when the note matures, or that adjustable rate mortgages are a better deal than fixed rate!
Myth: Real Estate Market Can't Go Bust
Another mythical idea is that the real estate market can't go bust. An exploding growth rate in the mortgage loan industry, and the continued surge in real estate prices, has put the interest only mortgages in a mammoth category all their own. Up from the first part of the century, the interest only mortgage loans are now garnering nearly one-fourth of the mortgage loan market.
It is almost frightening the growth to even the most experienced lender. Can you visualize the possibilities, say four to five years from now, when many of these loans come because of pay the interest and the principal; what happens if our economy isn't still a thriving bustling place?
The ability of consumer to eligible for buying much more house is the benefit of the interest only loan, than with a standard mortgage. If you're certain in a given period of time that's great, you'll be able to pay for a higher mortgage payment. But is anything certain and given in this day and time? What if you can't afford the payment when the interest only term expires?
During the 1920s, we have only to look at the disastrous consequences of the crash of the stock market to be grateful for where this may be leading us today. With an interest only mortgage, many people had financed their homes, and they lost everything, including their homes when the stock market crashed and there was no work.
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