Straight Talk About Real Estate

If you want the security of a fixed rate, but need to keep your payments as low as possible, the Interest-Only payment option is a good choice.

Here is an example:

Let’s say your loan amount is $300,000. Let’s assume a 6.5% interest rate for a 30-year fixed rate. If the payment was based on the loan being fully amortized over 30 years, your monthly would be $1,896. If you pay interest only, the payment drops to $1,625, a significant difference of $271 a month.

This is how this Interest-Only loan works. You pay only the interest on your loan for the first 10 years. No principle is paid. At the end of 10 years, the amount you owe remains at $300,000. At the start of the 11th year, the $300,000 is amortized over the remaining 20 years so that the balance is paid off completely after a total of 30 years of the life of the loan. The good part about this loan is that the interest rate does not change.

Your payment at the start of the 11th year obviously will go up. In this example of a $300,000 loan, the payment will jump to $2,237. This is because the payment will include paying off the principle. So while you pay more, you are finally paying off the debt.

Although this big increase in payment sounds scary, most people who get this loan will sell the house before then. Afterall, who stays in a house longer than 5-7 years these days?

You can also refinance out of the loan since there should not be a prepayment penalty on this type of loan.

You would also hope that in 10 years, your financial situation should be better. Your wages would increase to cover the higher payment.

Again, the beauty of the loan is, you have the security of a fixed rate. In today’s climate of low rates, you would do well to take advantage of a fixed rate.