Considering an Interest Only Mortgage?

Young couple with their child. Information on IO ARM financing.

Looking for a way to minimize your mortgage payment for a short period of time. Maybe it is worth exploring an interest only ARM with a mortgage professional.

Are you looking to keep your monthly mortgage payments as low as possible for a short period of time? If so, you might want to conduct some research on interest only (IO) ARM financing solutions. Many lenders offer IO adjustable rate mortgages with introductory rate terms of 3, 5, 7, and even 10 years. We’ve compiled some information on the various programs (see below). Please note that not all lenders offer interest only financing and not all states permit these types of loans. Interest only loans and adjustable rate mortgages do carry a higher degree of risk which is why some states and mortgage companies do not participate in this marketplace. Consult with a licensed mortgage professional serving your area for more information on these home financing solutions.

30/10 and 30/15 Year Interest Only Mortgage

These programs have increased in popularity over the years as borrowers have steered away from adjustable rate financing. With 30 year interest only loans, the interest only portion of the payment is due for a set number of years with 10 and 15 years being popular options. That’s what the second number in 30/10 and 30/15 represents. After the initial interest only period ends, the principal repayment is squeezed into the remaining years of the loan. Thus, borrowers will be looking a pretty hefty payment adjustment come year 10 or 15. ¬†Borrowers may be able to make principal reduction payments during the interest only period which may help cushion the future spike while allowing them to make interest only payments on months when they may need to reallocate their financial resources (ask your mortgage professional for details). You can find additional information on these programs here.

10 Year Interest Only ARM Loans

Most 10 year adjustable rate interest only mortgages are 30 year amortizing loans where the introductory period of the loan remains in place for the first ten years of the loan. During this same introductory period, a consumer may elect to only pay the interest portion of their monthly payment. After the first ten years pass, the loan then can adjusts up or down based upon the loan’s margin, caps, and the current rate of the idex which the loan is tied too. Also, the principal portion of the mortgage then comes into play and will be due in its entirety during the remaining 20 years of the loan.

Basics of 7/1 IO ARM Mortgages

Please note that 7 year interest only loan programs vary by investor. Make sure to consult with a mortgage professional before making a decision.

Here is a basic overview of how many 7 year interest only loans are set-up (see note above):

  • Loans are typically 30 year mortgages where rate is set for the first 7 years of the loan and then will begin to adjust after those first 84 months pass. You will want to review the adjustable rate handbook available from your lender and/or broker and pay close attention to the loan’s margin, caps, and the index it is associated with.
  • Interest only period is for the first 7 years as and then principal reduction payments must be made.

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 5year 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.
  • Find more information on 5 year interest only home loans here.

How Do 3 Year Interest Only Mortgages Work

It is important to note that 3/1 interest only mortgages will vary by investor. Be sure to ask your mortgage professional for details on their specific product offerings. Consumers should be well versed in the pros and cons of these products before moving forward.

Here is an overview of how many three year interest only loans function (see note above):

  • Loans are typically 30 year amortizing mortgages where rates are set for the initial three years of the loans and then will begin to adjust after those first 36 months pass. You will want to read through 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 just for the first 3 years of the loan and then principal payments must be made. Consumers must be aware that the remaining principal balance needs be paid off during the last 27 years of the loan.

Review current mortgage rates for a variety of mortgage programs from competing lenders, brokers, and banks using the rate table below: