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Cub Fan
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0.10 Dollars($)
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 Posted: Fri Jul 20, 2007 12:15 pm Post subject: interest only loan |
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I am considering changing my current adjustable rate mortgage plan to a "interest only" mortgage plan for a year to allow me some flexibility to pay down my credit card debt. I am $15,000 in the hole.
I realize that the principle amount may increase as a result. What other factors should I be aware of before I decide on this plan.
Any advice would be much appreciated.
Cordially,
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 miller_st
Joined: 17 Jan 2007
Posts: 917
168.84 Dollars($)
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| Posted: Fri Jul 20, 2007 12:24 pm Post subject: |
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| Quote: | | I realize that the principle amount may increase as a result. |
You are correct. In case of interest only payment option principal won't decrease. But if the minimum payment option is selected then only it will happen that the mortgage balance will increase.
Let take one example;
If a 30-year loan of $100,000 at 6.25% is interest only, the required payment is $520.83.
In contrast, person who has the same mortgage but without an Interest Only option, will have to pay $615.72.
This is the "fully amortizing payment", payment that wil pay off the loan over the term if the rate stayed the same. The difference in payment of $94.88 is "principal", which goes towards reducing the balance.
Miller |
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Niicss
Joined: 03 Oct 2005
Posts: 1287
Location: New Jersey
193.02 Dollars($)
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| Posted: Fri Jul 20, 2007 12:32 pm Post subject: |
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IO option is available for both arms and frms. First you have to look if you want an arm or frm. Base your decision about selecting the type of mortgage (arm or frm) on how long you want to have the mortgage. You have to judge whether you will be able to make the increased payments after the IO period is over.
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Cubs Fan
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0.10 Dollars($)
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| Posted: Fri Jul 20, 2007 6:50 pm Post subject: still unsure |
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Thank you Niicss and miller_st. I found you advice very helpful. However I am a bit unsure of a few things.
I barely scrape by on my current salary. I've refinanced my mortgage twice in recent years just to make my monthly mortgage payments manageable and I have my credit card debt to deal with.
Is this type of mortage a risky proposition for someone like me?
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helping_user
Joined: 31 Mar 2006
Posts: 803
Location: Hawaii
149.53 Dollars($)
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| Posted: Fri Jul 20, 2007 10:19 pm Post subject: RE: is interest-only option a good one? |
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Welcome Cub fan.
I think it is a risky proposition for someone like you. Is it possible that you get a second source of income, may be a part time job so that you could supplement your current salary with the second source income?
Regarding the factors you speak of, well, I shall agree with you here. The principal amount in an interest-only loan does go on increasing as one has to pay only the interest on a monthly basis. So, the debt starts accumulating and after the interest-only period is over, you will have to pay the balance in monthly installments. And, this time, the monthly payments would certainly shoot up compared to that of the interest-only period. This is because the payments would take into account the amount you haven't paid towards the principal and the remaining balance.
One more thing that I would like to tell you is that, your loan is an ARM, so the payments may increase any time the rate goes higher and then you'll have a lot of money being unpaid towards the principal during the interest-only period. So, until and unless your financial situation improves, I don't think you should go for it.
Thanks. |
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