Interest Only Mortgage Loans

Interest Only Mortgages - Advantages / Disadvantages

Attn: Special Adjustable Rates Available Until For Residents Of Virginia & Neighboring States!

There is a loan product aptly known as an 'Interest Only Mortgage.'  This type of loan or mortgage is available as either a fixed-rate-mortgage (FRM for short) or as an adjustable-rate-mortgage (ARM for short.)  This version of a mortgage allows the home owner to pay just the interest due on the mortgage on a monthly basis for a set amount of time, i.e. 3, 5, 7, or 10 years.  At the end of this time period, the loan balance will be same as when the loan was taken out - principle will not have been reduced.

After the initial term, the loan becomes 'amortized' (complete) and monthly payments will generally increase.  The longer the initial term, the higher the new payments may be.  However, at this time, the home owner will have the opportunity to refinance their loan to a new, current rate.  Interest only mortgages certainly have their advantages.  Another thing to remember, most people have better credit than they think, usually Fair Credit or better, keep this in mind while filling out our online form.   When contacted by us, kindly ask our loan professional any question you may have.  They will be more than happy to assist you in making sure an interest only mortgage is best for you.  Remember, all loans don't fit all people; if you need a mortgage loan, we'll find the right one for you.

The disadvantages to this type of loan are obvious; but as with any decision, the good may outweigh the bad.  Here are some advantages and disadvantages to consider about an interest-only mortgage, according to bankrate.com:

Advantages of an interest-only-mortgage

  • Your payments are as low as they can get during the interest only time.
  • A larger home or a bigger loan amount may be possible, if you qualify.
  • No cash paid out to build up equity as your home appreciates.
  • You can invest the amount that would go towards the principal.   This increases your net worth.
  • The whole payment is a tax deduction at the end of the years in the interest only term.

Disadvantages of an interest-only-mortgage

  • After the initial term of 3 - 10 years, your monthly payments could increase.
  • This could lead you to refinancing and there are additional costs to that.
  • Foreclosure could be a possibility if monthly payments increase too much and refinancing is not possible.
  • You will always owe what you originally owed - no principle reduction.

interest only mortgage

The London Inter-Bank Offered Rate (LIBOR) is the basis for a LIBOR indexed interest-only-mortgage loan, says Investopedia.com.  The rate plus parts of a percentage point determines the interest only payment amount on a loan balance.  Note:  the margin does not change with any length of loan.

  • One Month LIBOR Loan:  LIBOR index plus the nearest 1/8th of a point.  Rate will adjust monthly.
  • Six Month LIBOR Loan:  LIBOR index plus the nearest 1/8th of a point.  Rate adjusted every six months.
  • One Year LIBOR Loan:  LIBOR index plus the nearest 1/8th of a point.   Rate will adjust on an annual basis.
  • Three Year LIBOR Loan:  Rate is fixed the first 3 years.   Remaining years adjusted annually to LIBOR rate plus nearest 1/8th of a point.  Fully amortized after month 37 and payments increase to include principal.
  • Five Year LIBOR Loan:  Rate is fixed over the first 5 years.   Remaining years adjusted annually to LIBOR rate plus nearest 1/8th of a point.  Fully amortized after month 61 and payments increase to include principal.
  • Seven Year LIBOR Loan:  Rate is fixed over the first 7 years.   Remaining years adjusted annually to LIBOR rate plus nearest 1/8th of a point.  Fully amortized after month 85 and payments increase to include principal.
  • Ten Year LIBOR Loan:  Rate is fixed over the first 10 years.   Remaining years adjusted annually to LIBOR rate plus nearest 1/8th of a point.  Fully amortized after month 121 and payments increase to include principal.

There are also 30 year fixed rate loans, with 10 and 15 year fixed rate interest only terms. The first ten or fifteen years is interest only, then the payments increase because the loan becomes fully amortized for the remaining length of the loan. Most lenders will let you make payments on the principal during this time if you so choose.

You Decide What Is Best For You

When applying for a loan, you may be offered either type of loan: interest only or standard.  Consider your options wisely.   Whatever you decide to do, Peak Home Loans can help you obtain the financing you need for your dream home.  We can help with fair, good or excellent credit situations, and can get you the best rates and terms.  Peak Home Loans is here to help.


Mortgage Refinance @ 3.25% - 100k is $435/mo.

Thank you,
Peak Home Loans

close this page

Peak Home Loans is listed by Dun & Bradstreet
Verisign 128-bit encrypted security
SSL Certificate
We have earned multiple consumer awards from the Nation's top Mortgage and Website reviewers for having the highest customer satisfaction and trust.