Interest Only Loans

An 80/20 mortgage loan, called a combination or piggy-back mortgage, is useful at times but, in some circumstances, should be avoided. 80/20 interest only loan products can be more risky than fully amortizing products, although at times, they can also be financially smart.

Basically, 80/20 mortgage loans are initially useful for borrowers who are severely down payment challenged. You can purchase a home with no money down since your lender is giving you an 80% loan to value (LTV) first mortgage and a 20% purchase money second mortgage to complete the deal. Since your first mortgage is made at the standard 80% LTV, you will not have to pay private mortgage insurance (PMI) on the difference. For borrowers with little cash, this mortgage loan can be a way to get that first home or to buy "more house" than you can otherwise afford.

However, depending on your projected financial situation and the future real estate market, you could find yourself "under water," having mortgage balances larger than the fair market value (FMV) of your home. Should you need to sell or refinance your property for some reason after a few years, you could be in a serious financial bind.

Use an interest only home loan calculator to estimate both your current and future monthly payment (after the fixed period of your mortgage loan expires) to get an idea what a worst case situation might be if interest rates climb sharply. Also, do your homework and get some knowledge of the projected future of real estate values in your area for the coming three to five years. If the experts project rapidly increasing property values, you might win big with an 80/20 interest only home loan. Should the reverse be predicted, you might be very sorry you used this loan. Also, try to project your interest only loan amortization if you plan on making some principal payments during the first five years. This will help you project some future monthly payments with this lower balance.

Finally, remember, you must have the monthly cash flow to make not one, but two monthly payments during the 80/20 loan term. Make sure this requirement does not project to become a financial hardship for you. If all of these factors are "positive", consider using an 80/20 interest only loan to get the home you want. Should one or more of these factors project future problems, you might want to concentrate on another solution.

If you are interested in an interest only mortgage loan, there should be one or more good reasons to decide to procure one. Here are some of the best reasons to get interest only purchase or interest only refinance loans:

• You feel more comfortable paying down principal at your convenience, not by your lender's schedule;
• You want to buy "more house" than your current gross monthly income and debt structure allows;
• You have an opportunity to invest the extra cash flow you'll enjoy in something that makes you more money;
• You might have the opportunity to enjoy a quick capital gain by reselling your property in a rapidly escalating real estate market;
• You're going to get an 80/20 interest only loan and need the extra cash flow to pay the 20% second mortgage; and
• You can get interest only home loan program terms that reduce the required monthly payment as your principal reduces, and you have the cash flow to make some principal payments.

Home equity loans may or may not be interest only. Interest only home equity loans are normally written as home equity line-of-credit (HELOC) products. The majority of pure home equity loans are written as fully amortizing fixed or adjustable rate second mortgages.

The primary reason interest only equity loans tend to work better with HELOC's is a result of the sometimes wildly fluctuating outstanding balances. A HELOC lender approves you for a maximum loan amount, to be added to and or paid down at your, not their discretion. Having a credit line up to $35,000 is wonderful for both borrower and lender. Except for the fact that you control the balance and your lender earns nothing if your balance stays at zero, and earns relatively little if you never keep a balance of more than $5,000 or $10,000. As you can see, it would be impossible to construct a fixed monthly payment and potentially risky (for the lender) to offer a fixed interest rate.

Interest only mortgage lenders are content to accept their earnings on a monthly basis in the form of their interest income and leave the principal repayment decisions to you. Interest only loan rates are very competitive because whatever level of your balance, it may not be reduced on a regular basis, so the same amount of interest is paid each month your outstanding amount remains constant. A straight home equity loan, wherein you borrow an amount of money, your lender gives you the money, and you begin repayment in 30 days, lends itself more to a standard fully amortizing product, to be fully be paid in 5, 10, or 15 years.

Jumbo mortgage loans are those that are higher than standard conforming loans, like those offered from Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Fannie and Freddie tend to set the bar on mortgage loan maximums for the majority of loans made in the U.S. The market for jumbo mortgage loans, however, involves huge dollars if not comparable numbers of loans.

Jumbo mortgages lend themselves quite well to interest only home loan situations. Because of the large balances involved with jumbo loans, saving monthly cash flow with lowered payments. Also, since many jumbo borrowers have excellent monthly income, they may be better able to make significant principal payments when circumstances warrant. Finally, many jumbo loan holders are better able to manage unexpected interest rate increases than are other segments of the population.

It is still helpful to use an interest only mortgage calculator to accurately project monthly payments at the beginning of the loan and estimate what might happen with a 3/1, 5/1, etc. loan (three years fixed, five years fixed, etc.) after the initial fixed rate period expires. While interest rates are a bit higher for jumbo mortgage loans, interest only jumbo rates will be comparable to those offered by fully amortizing loans.

The normal self-amortizing mortgage loan is constructed to pay off the principal (the amount you borrowed) in the time frame in which the loan is written (normally 30 years). In the case of an interest only mortgage loan, the required monthly payment includes only the interest due with no principal payment needed. As you compile interest only loan information, you will learn that there are a number of varieties of interest only house loans.

For instance, you can find fixed interest only loans and interest only ARM loans (Adjustable Rate Mortgage). Even a fixed rate interest only loan can be written as a 5 year interest only loan, a 10 year interest only loan, or a 30 year interest only loan. You can now even find a 40 year interest only loan if you look hard enough. In the case of 5 and 10 year products, the interest only mortgage rates will be fixed for the 5 and 10 year periods, but will move to a current market rate after the initial period. Most of these will also become fully amortizing loans at the adjustment date as the principal has to be paid of sometime.

Even the best interest only loan is definitely not for everyone. If you are among the "high net worth" wealthy population (and have other investment choices for your principal), need the lower monthly payment to qualify for the mortgage you need, or are in a rapidly escalating real estate values environment and plan to sell or refinance your home in a few years, interest only loans may make sense. In many other situations, this may be the wrong course of action. The answer to "How does an interest only loan work?" is less important than learning what is an interest only loan and how it might help or hurt your financial situation.

Interest only loans are available for borrowers with poor credit scores. Bad credit interest only loans will be "pricey," however. The combined added risk of borrowers with less than perfect credit plus an interest only home loan requires lenders to price these loans accordingly.

Like all interest only home mortgage loans, this will still normally result in a lower monthly payment at the beginning of the loan. When you calculate interest only loan terms, get some current interest rates for sub-prime loans. Also, when calculating interest only loan payments, don't forget to project what might happen when your interest only period expires (3, 5, 10 years) to project a potential interest rate an non interest only loan amortization schedule. At this point, you'll probably have to begin to repay some of your principal borrowed.

Therefore, if an interest only mortgage loan interests you and you have credit issues, you'll still be able to use this loan type. Just be sure to get all the knowledge you can and use it to make the best decision for you.

Although interest only house loans tend to be used primarily for purchases, interest only refinance loans are also available. Learn how to calculate interest only loans to get a realistic picture of your projected payment structure in comparison to your current mortgage terms. An interest payment calculator will help you put your refinance choices in proper perspective.

As with all refinance decisions, you should analyze, not only the immediate savings you will enjoy from having interest only loan payments, but also future prospects for change in the interest rate structure and real estate values in your area. Interest only mortgage loans almost always save you money at the beginning of their term. Using interest only mortgage loan calculators will help project what may happen with this loan in the longer term. All financial experts will recommend that one not use short term remedies to with long term investment or loan products. You can get in a bad "matching" situation with income, assets, and liabilities whose terms are not timely coordinated.

You might consider an interest only refinance loan because you need more cash out (a larger mortgage) than you can currently afford. Home improvements are needed and you need to qualify for a larger mortgage to complete your project. You need funds for your business and you also want to improve your monthly cash flow to free up extra cash. These are all good reasons to consider an interest only home loan for your refinance. Just be sure to consider the longer term risks, both interest rate and home value, before going forward.

Interest only home loan rates not only compare favorably with standard mortgage interest rates but sometimes are even lower. There are at least two primary reasons for this. First, the lender will earn the same interest income every month for at least the initial contract term (3, 5, 7, 10, etc.) of the loan. Instead of a fully amortizing loan wherein the interest amount you pay each month declines, you will pay the same amount of interest every month until you pay down some of your principal. This obviously good news for the lender and allows them to keep interest only home mortgage rates quite low. For the same reason, even bad credit interest only loans carry an interest rate that is competitive even in the sub-prime lending industry. Another reason for an interest only loan calculation that provides good rates is the competition factor. The consistent level of monthly interest, a lender benefit, is not necessarily a benefit to the borrower. A mortgage lender wanting to generate interest only loans must keep interest rates very competitive since the natural tendency of borrowers is to prefer a fully amortizing mortgage. Obviously, if you don't receive some benefits of interest only loans, you'll cross them off your list of desired financing for your home. Therefore, while there are factors to evaluate if you examine interest only loan program info, you normally need not be concerned with high interest rates.

There are pros and cons of interest only loans. In some circumstances, an interest only real estate loan is an ideal choice, while in others, it forms a potential recipe for problems.

Some Pros:

• Initial cash flow savings are impressive;
• In a rapidly escalating real estate market, values will increase to give you equity even without principal repayment;
• Enjoy below market interest rates with many loans;
• Receive a good rate that is fixed for some time period;
• Provides other cash for investment or important reasons;
• Allows you to purchase "more house" than with a standard mortgage loan; and
• Your total monthly payment is tax deductible.

• After the fixed period, you could suffer problem interest rate increases;
• If real estate market becomes "flat" or deflationary, you could lose equity;
• After interest only period, you will have monthly payments, including principal pay back, that could be much higher and impact your budget;
• If you keep your home long term, you may be forced to refinance when interest rates and terms are not favorable to you.