Interest-Only Mortgage Loan Overview
Find out more about interest-only mortgage rates and payments
If you're in the market for a mortgage, you may find the option of an interest-only mortgage. You may be wondering what this entails and if it might be right for you. To learn more about this type of mortgage, first review this guide to the basics.
What is included in an interest-only mortgage payment?
When you have an interest-only mortgage, your monthly payment consists of only the interest your home loan is accruing. This means your payment is lower than it would be if you were paying a fully amortizing payment, which is a combination of principal and interest.
How long will I pay only interest?
This is limited to a set period - sometimes five or seven years - as eventually you'll have to pay the principal. When you're only paying interest, you're not making any progress toward paying off the principal, or balance of the loan that you owe to the lender. (A fully amortizing payment does chip away at the balance.)
If you have variable income right now, an interest-only mortgage will hold your monthly payment down for those first few years, which may be a good thing. And, if you wanted to pay more in a month to pay down some of the principal, that option is available to you. Remember, you must meet the qualifications for an interest-only mortgage to receive one. Check with your lender for specific details.
How do interest-only mortgage rates vary?
These loans tend to represent more risk to lenders, so you may find higher interest rates. This is important to remember because when the interest-only period expires, that higher interest rate means your payment will increase substantially.
Which types of buyers should consider an interest-only mortgage loan?
Originally, these loans were designed for more expensive homes and wealthier buyers who had incomes based off of substantial commissions and bonuses. The rationale was that a higher monthly payment may be harder for them to pay on a regular basis, but when they receive their large lump sums, borrowers could then pay a considerable amount of money toward the principal. Interest-only mortgages have become available to more buyers in recent years, but you should still carefully consider your options.
An interest-only mortgage is not generally advised for the average homeowner who earns a steady wage and takes out a median home loan. This homeowner can likely find a mortgage with a regular monthly payment he or she can afford. Additionally, when the payments adjust at the end of the interest-only period to include the principal, the jump in the monthly payment might shock the budget.
So, who are the best candidates for interest-only mortgage loans? Homeowners who fall into that original group of buyers who have income driven by bonuses, commissions and such.
What are my options when the interest-only period expires?
No matter your situation, remember the interest-only period is only temporary, so you'll still need a plan to pay off your mortgage when it expires. At that time, you may be able to refinance the loan into a fixed- or adjustable-rate mortgage, pay off the remaining balance, or stick with your payment plan even as your monthly payments increase.
Work with Citizens Bank on your mortgage
If you have more questions about your mortgage options, Citizens Bank can help. Reach out to one of our home loan advisors at 1-888-514-2300 to learn more about mortgages or to start your application. You can also start your mortgage application online, and a home loan advisor will contact you to complete the process.