Interest Only Mortgage Qualification Calculator
Use our Interest Only Mortgage Qualification Calculator to determine what size interest only loan you qualify for based on your net income and monthly debt expenses. Borrowers can typically qualify for a larger mortgage with an interest only loan because the initial monthly payment is lower than other types of loans that require you to pay both principal and interest. We recommend that you evaluate multiple scenario to understand the loan amount you can afford based on your personal profile and different interest only period rates.
Watch our Interest Only Mortgage Qualification Calculator "How To" videoHow Our Interest Only Mortgage Qualification Calculator Works
Qualifying for an interest only mortgage is different than for other types of loans. Interest only loans involve more risk for borrowers but also offer benefits including being able to afford a larger loan amount. Our Interest Only Mortgage Qualification Calculator uses the following inputs to determine the loan you qualify for:
Net Income. This is your income after deductions such as taxes, social security and medicare, also known as your take home pay. The more money you make, the higher the mortgage amount you can afford.
Monthly Debt Payments. This figure includes payments for credit cards as well as car, student and personal loans but excludes your current housing expense such as your rent or mortgage payment. Input your monthly debt payment and not your current loan balance. For example if you pay $525 per month on a car loan with a $5,000 balance, you include $525 in the monthly debt payments field. The lower your debt, the higher the mortgage amount you can afford.
Interest Only Period Interest Rate. This is the rate you pay during the interest only period of the mortgage. For example, for a five year interest only loan, you pay the the interest only period rate for the first five years of mortgage. Please note that you interest rate is subject to change and potentially increase when the interest only period expires.
Our calculator uses your inputs to determine the mortgage you can afford and other helpful outputs.
Interest Only Mortgage You Qualify For. This is the mortgage you can afford based on your income, debt and the interest only period rate. As demonstrated by our calculator, with an interest only mortgage, you can afford a larger loan amount which means your mortgage dollars stretch further.
Interest Only Period Mortgage Payment. This is your payment during the initial interest only phase of the loan. The lower your mortgage rate, the lower your payment. This payment does not include principal. Your payment usually increases when the mortgage converts into an amortizing loan and you are required to start paying principal.
Total Monthly Housing Expense. This includes your monthly mortgage payment plus property tax and homeowners insurance so you can understand the total cost of owning a home. Property tax and insurance vary based on property value and location. Borrowers can typically afford higher priced homes with an interest only mortgage so other housing expenses tend to be higher.
Mortgage Balance at End of the Interest Only Period. The principal loan balance at the end of the interest only period is the same as your original mortgage amount which highlights that you do not pay down the loan initially. This is another reason why your payment increases when the loan starts to amortize.
A significant increase in your monthly mortgage payment is the primary risk of an interest only loan so you should be sure to understand this downside.
Qualifying for an Interest Only Mortgage
Interest Only Mortgage Basics
With an an interest only mortgage you pay only interest and no principal during the first three, five, seven or ten years of the mortgage, which is called the interest only period, and then loan converts into an amortizing mortgage and you pay both principal and interest for the remainder of the mortgage, and the interest rate is subject to change. Interest only mortgages are often referred to as 3/1, 5/1, 7/1 or 10/1 Interest Only ARMs (IO ARMs) with the first number indicating the length of the interest only period and the second number indicating how frequently the interest rate can change during the adjustable rate period. For example, with a 7/1 interest only mortgage, you pay only interest at a fixed interest rate for the first seven years of the loan and then you pay both interest and principal plus your mortgage rate is subject to change and potentially increase on an annual basis for the remaining 23 years of the loan.
You Can Afford a Larger Mortgage
Your monthly payment during the interest only period of an interest only mortgage is lower because you do not pay any principal. Additionally, the interest rate for an interest only mortgage during the interest only period is typically lower than the rate for a 30 year fixed rate mortgage. A lower interest rate and monthly payment allow you to qualify for a larger mortgage amount as compared to other types of mortgages such as a fixed rate or adjustable rate mortgage (ARM). The ability to afford a larger mortgage is one of the key benefits of an interest only loan. Use our Interest Only Mortgage Qualification Calculator to understand the higher loan amount you can afford.
Interest Only Mortgage Borrower Qualification Requirements
Some lenders apply tougher mortgage qualification requirements for interest only mortgages. For example, lenders may apply a lower loan-to-value (LTV) ratio requirement for interest only mortgages which means borrowers are required to make a larger down payment or have more equity in their homes. Some interest only mortgage lenders also require borrowers to have higher credit scores. Additionally, following the collapse of the real estate market, many lenders stopped offering interest only mortgages due to new mortgage regulations and other considerations. Borrowers may need to contact multiple lenders to find one that offers interest only mortgages and borrowers should be sure to understand the lender's qualification requirements before moving forward with their mortgage.
Risks of an Interest Only Mortgage
Although interest only mortgages offer benefits such as a lower monthly payment and the ability to qualify for a larger mortgage, borrowers should be sure to consider the risks of an interest only mortgage. Risks of an interest only mortgage include the possibility that your monthly mortgage payment spikes in the future. When your mortgage changes from an interest only loan to an amortizing mortgage, your mortgage payment typically increases because you start paying both interest and principal plus your interest rate can increase which would cause your payment to jump even more. Interest only mortgages are typically better suited for borrowers with a higher risk appetite or who are going to sell their homes and pay off their loan before the end of the interest only period. Borrowers who prefer certainty and financial security should not select an interest only mortgage due to the potential risk of payment shock. Our Interest Only Mortgage Mortgage Qualification Calculator highlights that you have paid down none of you principal loan balance at the end of the loan's initial interest only period.
Pay Down the Loan on Your Schedule
Just because an interest only mortgage does not require you to pay principal during the initial phase of the loan does not mean you cannot do it. Many borrowers elect to pay down their principal loan balance by adding extra payments or making a lump sum payment annually or semi-annually. This is why interest only loans are well suited for applicants with significant income fluctuations or who earn a meaningful portion of their income from bonuses or commissions. The flexibility of an interest only mortgage enables these borrowers to pay down principal on a schedule that better matches the timing and amount of their earnings.
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More FREEandCLEAR Mortgage Resources
Interest Only Mortgage Basics
Review our in-depth overview of how an interest only mortgage works including key program terms, benefits of an interest only mortgage and helpul examples
Risks of an Interest Only Mortgage
Understand the downsides of an interest only mortgage including a potential significant jump in your payment when you are required to start paying principal
Interest Only Mortgage Rates
Review interest rates for only mortgages based on interest only period length, loan-to-value (LTV) ratio and other factors. Comparing proposals from multiple lenders is the best way to save money on your interest only mortgage
What Mortgage Program Is Right for Me?
Compare the pros and cons of an Interest Only Mortgage to other mortgage programs such as a fixed rate or adjustable rate mortgage (ARM) to select the program that is right for you
Sources
"Interest-Only Mortgage Payments and Payment-Option ARMs." FDIC. Federal Deposit Insurance Corporation, October 2006. Web.