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What is a interest only mortgage product?

Most often the Interest-Only feature for mortgages are available with the non-conforming 5/1 ARM product. This is the most common term for such a loan but they do have this interest only for 1 year 7 year 10 year and 2/28 arm mortgages.

Example of a Interest only 5 /1 arm mortgage.

For the best help lets go with the 5/1 ARM loan to explain how the interest only mortgage works. The payments are only of interest during the first five years of the mortgage's term.  Beginning with the first interest change date (at 59 months from the first payment due date), the loan payment will include principal payment.  For the remaining term of the mortgage, the loan will fully amortize with principal and interest payments.

So Interest only is a general OPTION someone can choose for regular arm mortgage products. That product option is not offered in a fixed rate because the loan must eventually have a chance to adjust so that the principle will be paid off.

Why use this option? Well lets compare the payments on a Interest Only Mortgage to a payment on a standard mortgage without the Interest Only Option.

So, If there are 30 days in the month on a interest only mortgage the payment would be $903.90 on a regular loan with out the Interest only option the full PI payment will be $1135.57. * PI stands for Principle & Interest

You can compute a interest only payment for yourself by following a simple guideline.

Take the principle you are borrowing times that by the rate on the mortgage loan (in a percent) and divide it by 365 (the days in the year) and you will have your daily interest. Times that by the days in the month. This number is the payment for an Interest Only Mortgage.

Example

128,500 x .06125 / 365 = 21.56 x 30 = 646.80

128,500 (loan amount)   x .06125 (the rate 6.125%) / 365 (divided by the days in the year) = 21.56 (interest a day on the loan) then times that by days in a month x 30 = $646.80

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The key point to remember!

A Interest Only loan is still a adjustable rate mortgage with the option for paying interest only. The loan is still a regular mortgage purchase loan or refinance mortgage you just need to specify to the loan officer who is writing the file that you want to get quotes for the Interest Only Option on the loan.

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