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Interest Only Mortgage Rates

Current Interest Only Mortgage Rates and Lenders

Review current interest only mortgage rates for December 11, 2018. Use the table below to compare interest only mortgage rates. The table shows interest rates, APRs, fees and monthly payments for three, five and seven year interest only loans. The mortgages are also called interest only ARMs or IO ARMs for short. During the initial period of the mortgage you pay only interest and no principal and then loan converts into an amortizing mortgage. During this phase of the loan the mortgage rate is subject to adjust and potentially increase on an annual basis for the remainder of the loan.
Because you do not pay principal for the first several years of the mortgage, the initial payment on an interest only loan is lower than for other types of mortgages plus you may be able to afford a larger loan amount. The drawback of an interest only mortgage is that your monthly payment can also increase significantly when the loan starts to amortize and your mortgage rate can also go up, which are important risks for borrowers to keep in mind.
Interest only mortgage rate pricing is determined by your loan amount, LTV ratio, if you pay discount points as well as the length of the interest only period, with the shorter the period, the lower your rate. You can input your specific criteria into the search menu to review current interest only mortgage rates for different loan types and lenders. Fewer lenders offer interest only mortgages plus there can be significant differences in loan terms so you should shop multiple lenders to find the loan and program that are right for you.

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
 

Why Select an Interest Only Mortgage

1

Lowest Initial Monthly Payment.

With an interest only mortgage you pay only interest and no principal during the for the first 3, 5, 7 or 10 years of the loan, which is called the interest only period. Additionally, your interest rate is fixed and does not change during the interest only period. Plus, interest only mortgage rates tend to be lower than fixed mortgage rates, depending on the length of the interest only period.  Because you are not paying principal during the interest only period, your monthly payment is lower than the payment for an amortizing loan such as a fixed rate mortgage or an adjustable rate mortgage (ARM), when the borrower pays both principal and interest. The flipside is that at the end of the interest only period, your payment increases because your are required to start paying both principal and interest for the remainder of the loan term, which is usually 30 years. Plus, your interest rate can potentially increase during this period of the loan which would cause your payment to go up even more.

2

Larger Mortgage Amount.

The lower initial monthly payment provided by an interest only mortgage enables borrowers to afford a higher loan amount and buy more home. Being able to afford for a larger mortgage is one of the main benefits of an interest only mortgage. Borrowers who are enticed by the lower payment and higher mortgage amount offered by an interest only mortgage should also be aware of the possible payment shock in the future. Borrowers need to make sure that they can afford their monthly payment both at the beginning of the mortgage and over time when their payment is highly likely to increase.

3

Pay Down Principal on Your Terms.

An interest only mortgage enables borrowers to pay down principal based on their schedule as opposed to on a scheduled monthly basis like with a fixed rate mortgage or ARM. Borrowers can elect to pay down principal during the interest only period of the loan, even though they are not required to. When you pay down your principal mortgage balance during the interest only period, your required monthly payment also goes down. The flexibility to pay down principal when you want to makes interest only mortgages well suited for individuals who earn a modest monthly salary but a significant annual bonus. Borrowers in this position benefit from the lower monthly mortgage payments but can use a portion of their bonus to pay down their principal loan balance.

4

Your Are Going to Own Your Home for a Shorter Time Period.

If you know that you are only going to own your home for the length of the interest only period, then an interest only mortgage may be the right option for you. That way you benefit from the lower monthly mortgage payment during the initial interest only period but you are not exposed to an increase in monthly payment and possibly interest rate at the end of the interest only period when the loan starts to amortize. Keep in mind that with an interest only mortgage, you do not pay down your loan balance during the interest only period and therefore build no equity in your home unless your property value increases.

5

You Think Interest Rates Are Going to Go Down.

Predicting what direction mortgage rates will go in the future is nearly impossible but if you are confident that rates are going to decline than an interest only mortgage may be a good option. If you are in the adjustable rate phase of an interest only loan when mortgage rates go down, then your monthly payment also declines. If you are in the interest only phase of the loan then changes in interest rates do not impact your payment. So if it interest rates are high it may actually be a good time to get an interest only mortgage because you take advantage of lower fixed payment initially along with the potential to benefit from lower rates in the future.

6

You Like Risk.

Interest only mortgage are the riskiest financing option for borrowers because your monthly payment can increase suddenly and significantly when the loan amortizes and you start paying principal. If interest rates also increase at the same time, your payment go up even more. This means that the possibility for payment shock is highest with an interest only mortgage. Borrowers should be comfortable with financial risk and be fully aware of both the positives and negatives before selecting an interest only mortgage.

Why Borrowers Compare Interest Only Mortgage Rates on FREEandCLEAR

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More FREEandCLEAR Mortgage Resources

Mortgage Calculators

Interest Only Mortgage Calculator

Our Interest Only Mortgage Calculator enables you to determine your initial monthly payment and worst case scenario for an Interest Only Mortgage using current interest rates

Programs

Interest Only Mortgage Overview

Review our comprehensive overview of how an interest only mortgage works including key loan program terms

Mortgage Guides

Downside of an Interest Only Mortgage

Interest only mortgages are the riskiest type of mortgage. Borrowers should review the risks of an interest only mortgage to make sure they understand the serious downsides

Mortgage Expert Insights

What Mortgage Program is Right for Me?

Review the pros and cons of the three main types of mortgages (fixed rate, adjustable rate (ARM) and interest only) to select the mortgage type that is right for you

Sources

Interest Only Mortgage: https://www.consumerfinance.gov/ask-cfpb/what-is-an-interest-only-loan-en-101/

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