![]() Once the initial period expires, assuming you made no principal payments during the introductory period and the remaining 20-year period on the loan were to retain a 6% interest rate, your monthly principal and interest payment would shoot up to roughly $5,015. Your monthly costs will come out to around $3,500 (0.06 × $700,000 / 12 months). Say you get a 30-year jumbo interest-only loan of $700,000 at 6% interest with a 10-year introductory period. Nevertheless, let’s take a look at a basic example to see what you could generally expect with one of these types of loans. How much monthly payments increase after the expiration of the interest-only period depends on several factors, such as loan type, loan amount, if the borrower made additional payments during the initial phase of the loan, interest rates and interest rate changes, if applicable. The Monthly Payment Difference After the Interest-Only Period Ends ![]() With fixed-rate interest-only loans, the interest rate remains the same for the entire loan term. ![]() After that, the rate adjusts once every year (represented by the “1”) for the rest of the loan term based on the movements of a benchmark interest rate, such as the Secured Overnight Financing Rate (SOFR), plus a predetermined number of lender-added percentage points (the margin).Īlternatively, there are also fixed-rate interest-only loan products, but these are less common. Once the introductory period concludes, you must pay interest and principal for the remainder of the loan at the market rate, which can fluctuate up or down.įor instance, with an interest-only 5/1 ARM, the interest rate remains fixed for five years (represented by the “5”). With an “interest-only ARM,” you make interest-only payments at a fixed interest rate during the loan’s introductory period. There are several ways interest-only mortgages are structured, but the most common interest-only loans are structured similarly to adjustable-rate mortgages (ARMs). These loans tend to have stricter underwriting requirements compared to conventional loans and are geared more towards borrowers with the financial background and assets to qualify for much larger loan amounts. Not everyone qualifies for an interest-only mortgage. Additionally, because you only pay interest at the outset, you don’t immediately begin to accumulate home equity as you would with a conventional mortgage. However, there are trade-offs that come with those initial lower payments.įor one, interest-only mortgage rates tend to be higher than rates for conventional mortgages since mortgage lenders consider them a bigger risk, so you may end up paying more in interest over the life of the loan. ![]() Once this interest-only phase ends, the loan moves into an amortized schedule, during which you pay both the interest and principal for the remainder of the loan.įor borrowers who want to buy an investment property or keep their monthly payments low for a set period, an interest-only loan could be a good option. During this phase, you only pay the interest on the loan, or the cost of borrowing money from the lender. In most cases, interest-only loans begin with a designated period that can range between three and 10 years. What Is an Interest-Only Mortgage?Īn interest-only mortgage is a type of loan where you only need to pay the interest portion of your loan principal-at first. The calculator will then give you an estimate on how much you will pay monthly during the interest-only period, how much your monthly payments will be once the interest-only period ends and converts to the amortization phase, and how much you will pay over the entire loan term. To use this interest-only mortgage calculator, you’ll need to gather some basic information including: How To Use This Interest-Only Mortgage Calculator
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