Fixed Rate Mortgage versus an Interest only Mortga - With a fixed rate mortgage (FRM), your monthly payments will be steady
An interest-only mortgage may be appealing to a homeowner who is paid on commission. Interest-only loans give you the option of making a minimum payment of only interest on the mortgage. It is smart to pay more than the interest-only payment so your balance decreases.
In contrast, with an adjustable rate mortgage (ARM) , your payments will vary over time.
Adjustable rate mortgages typically have an initial fixed rate lower than the rate of a comparable fixed rate mortgage. The initial fixed rate period is followed by adjustment intervals. For example, a "3/1 ARM" is fixed at an initial low rate for the first 3 years, and then adjusts every year based on an index. Common ARMs are: 1/1, 3/1, 5/1, 7/1, and 10/1. (Don't confuse ARMs and balloons )
The average homeowner in America sells or refinances roughly every 5 years. Keeping this in mind, it may not always be in your best interest to go with a fixed rate mortgage for 30 years. An ARM loan may be more appropriate for you, especially if you know you plan on moving or refinancing within the first few years. A 5/1 ARM will generally provide a lower interest rate than a 30 year fixed rate mortgage will and the lower rate will equate to a lower mortgage payment. So think about not just the now when obtaining a mortgage but the near future as well.
Interest Only is an option that can be chosen for most types of mortgages, Fixed or ARMs. The interest only option allows the borrower to make only interest payments. This is usually only allowed for the first 5-10 yrs. Choosing an interest only option can also affect your interest rate. There is usually an add on of 0.25% - 0.5% to the interest rate for interest only payments.
Interest only loans are available with both fixed rates and adjustable rate mortgages. Paying the interest only allows borrowers to lower their monthly mortgage payment.
With an Interest Only loan, you make no payments to principle. They only way to gain equity is to make additional higher payments or choose a home in a high appreciation area.
An interest-only mortgage is a great option for someone who plans to purchase a home for investment purposes, put some money into it to fix it up, then "flip" it for a profit.
Just because you have an interest only mortgage doens't mean you can't pay towards the principle. Any amount of money you send in above the interest only payment will be used to decrease your loan balance and will decrease your interest only payment for the next month.
For borrowers seeking the lowest payments overall without sacrificing the predictability of a fixed rate, fixed rate or hybrid mortgages with interest only or minimum payment options are a popular choice. The minimum payment option is below the interest only payment, which allows the borrower to defer interest payments in exchange for the added cash flow, an excellent choice for some, but not all borrowers.
An interest only mortgage will save you money in the beginning but your payments will increase substantially when the interest only period expires. Interest only mortgages are great when one spouse leaves a career to raise a family or go to school, only to re enter the work force when the payments begin to adjust.
A fixed rate mortgage can provide security because the interest rate is the same for the life of the loan. An interest only mortgage has a lower initial rate and then the rate adjusts. The initial period can be as long as 10 or 15 years. An interest only mortgage will give you a lower monthly payment and allow you to qualify for a more expensive home.