Interest Only Mortgage – Key Items
By
Harry Jensen,
Trusted Mortgage Expert with 45+ Years of ExperienceHarry Jensen, Mortgage Expert
Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. Harry is a licensed mortgage professional (NMLS #236752). More about Harry
Key Interest Only Mortgage Concepts
| Term |
- Indicates the length of the mortgage, presented in years
- Interest only mortgages typically have a term of 30 years
- A 30 year interest only mortgage has 360 monthly mortgage payments (12 payments per year * 30 years = 360 total monthly payments)
- Monthly mortgage payments may change over the term of the mortgage
|
| Interest Only Period |
- Initial time period for an interest only mortgage during which the monthly payment is comprised of interest only
- The interest only period is typically 3, 5, 7 or 10 years
|
| Interest Only Interest Rate |
- The interest rate for the initial initial only period
- Fixed for the interest only period
|
| Adjustable Rate Period |
- The period of time from the end of the interest only period through the end of the term of the loan
- The interest rate is typically re-calculated on an annual basis during the adjustable rate period
- Interest only loans that convert into adjustable rate mortgages are called interest only ARMs
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| Adjustment Interval |
- Indicates how often the interest rate for an interest only ARM adjusts during the adjustable rate period
- The adjustment interval for most interest only ARMs is a year although some interest only ARMs have semi-annual (six month) intervals
|
| Fully-Indexed Rate |
- Interest rate for the adjustable rate period
- Calculated by adding the index to the margin
- The fully-indexed rate typically adjusts every year during the adjustable rate period and will change with fluctuations in interest rates
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| Index |
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| Margin |
- The second of two components used to calculate the fully-indexed rate
- The margin is a set interest rate amount that does not change over the term of the loan
- The margin is typically 2.0% - 2.5%
|
| Initial Adjustment Cap |
- A cap that limits the change in interest rate when it first adjusts following the interest only period
- The initial adjustment cap is typically 2.0% or 5.0%
- For example, if the initial adjustment cap is 5.0%, the initial fully indexed rate following the interest only period cannot go up by more than 5.0% as compared to the interest only period interest rate
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| Subsequent Adjustment Cap |
- A cap that limits the change in the fully-indexed rate in any adjustment period following the initial adjustment
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| Life Cap |
- A cap that limits the maximum increase in interest rate over the term of the mortgage
- The typical life cap for an interest only ARM is 5.0% which means the fully indexed rate cannot exceed the initial interest only period interest rate plus 5.0%
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About the authorHarry Jensen, Mortgage Expert
Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. Harry is a licensed mortgage professional (NMLS #236752). More about Harry
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