Adjustable Rate Interest-Only Loans

Many people who are short on cash for their monthly mortgage payments are turning to an interest-only loan as a way of qualifying for a home or of qualifying for a larger home than they could if they applied for a traditional fully-amortized home mortgage loan.

One of the things they are finding is that there is really no such thing as an interest-only loan, per se. What they are finding is that lenders who are willing to make interest-only loans are, in effect, tacking an interest-only option onto a standard 30-year mortgage.

In other words, instead of the standard fully-amortized 30-year loan, the borrower gets a 30-year loan with the option of making interest-only payments for the first 15 years of the loan, and after 15 years the loan transforms automatically into a fully-amortized 15-year loan.

So while an interest-only loan option attached to a standard fixed-rate 30-year mortgage loan allows a borrower to qualify more easily, attaching the interest-only option to a variable interest rate 30-year loan (which typically has a lower initial interest rate than a fixed-rate loan) will allow the borrower to qualify for an even larger loan in the future.

By combining the lower initial interest rate of a typical adjustable rate mortgage (ARM) with an interest-only payment option, a borrower can reduce his or her monthly payments considerably over a traditional fixed-rate fully-amortized mortgage loan. This added buying power can be used to either qualify for a larger loan or it can be used to qualify for the same sized loan but with greatly-reduced monthly payments.

Interest-only loans are not right for everyone, and market conditions at the time when the interest-only time-frame of the loan comes to an end may make it difficult for a borrower to sell or to refinance the loan. Therefore it is advisable that a borrower consult with a tax advisor before entering into an interest-only loan and that more than one loan-exit plan be in place.