5 Year Interest Only Mortgage Information

Scale for weighing the pros and cons of 5 year interest only mortgage financing.

Be sure to weigh the risks and rewards when considering refinancing or purchasing a home with a 5/1 interest only loan.

Looking for the low monthly payment made available by the low introductory rate of a 5/1 interest only ARM? 5 year interest only mortgages may be worth exploring for people who are planning on being in their properties for 5-7 years of less or those in need of a financing solution where they want to keep their mortgage payments as low as possible for the first 60 months (reasons such as having a having a child, upcoming college tuition, anticipation of increase in take home pay, etc). These loans are not ideal for most borrowers as they carry a higher level of risk when compared to fully amortizing fixed rate home loan products. Why the added risk? After the first five years pass, the principal portion of the loan will have to be paid over a 25 year window and the rate of interest owed on the mortgage begins to adjust up or down based upon the loan’s margin and the index which the loan is tied to. Be sure to consult with a licensed mortgage professional serving your state before selecting a 5 year interest only ARM solution.

What is a 5/1 IO ARM Loan?

5 year interest only loans will vary by lender so you will want to verify any of the information below to make sure that it applies to the mortgage that you are interested in obtaining.

Here is a very basic overview of how some 5 year interest only loans work (see note above):

  • Loans are usually 30 year amortizing mortgages where rates are set for the first five years of the loans and then will begin to adjust after those first 60 months pass. Be sure to spend some time reviewing the Adjustable Rate Handbook available from your lender and/or broker and pay attention to the mortgage’s margin, caps, and the index it is tied too.
  • Interest only period is for the first 5 years as and then principal payments must be made. Consumers need to be aware that the remaining principal balance must be paid off during the last 25 years of the loan which will make one’s monthly payment increase.

5/1 interest only mortgages are not available in every state. Be sure to check with a mortgage professional to see if a 5 year IO loan is an option in your state. Adjustable rate loans and interest only loans carry an elevated level of risk when compared to fully amortizing fixed rate products. Consumers should be well versed in the pros and cons of these products before moving forward.

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