Interest-Only Mortgage (Option)
Definition of "Interest-Only Mortgage (Option)"
An option attached to a mortgage, which allows the borrower to pay only the interest for some period. A mortgage is 'interest only' if the monthly mortgage payment does not include any repayment of principal. So long as the payment remains interest only, the loan balance remains unchanged. Interest-Only in the '20s and Now: If a loan is interest-only until maturity, the loan balance will be the same at maturity as it was at the outset. Back in the 1920s, loans of this type were the norm. Borrowers typically refinanced at term, which worked fine so long as the house didn't lose value and the borrower didn't lose his job. But the depression of the '30s caused a large proportion of these loans to go into foreclosure. Lenders stopped writing them and switched to fully amortizing loans. When interest-only loans were revived in this century, most were interest-only for a specified period, usually five to 10 years. At the end of that period, the payment was raised to the fully amortizing level. Purpose of Interest-Only (1): One purpose is to increase affordability by reducing mortgage payments in the early years. Purpose of Interest-Only (2): Another purpose of interest-only is to maximize investment leverage. A borrower earning 12% on investments wants to borrow as much at 6.25% as possible. Why pay down the mortgage to earn 6.25% when you can invest it to earn 12%? That seemed like a plausible policy during the late '90s when stock market returns were extremely high. In the more sober environment of 2002-2003, it didn't make sense for most borrowers. With the stock market in the tank and interest rates very low, mortgage loan repayment was the best investment available to most homeowners. Purpose of Interest-Only (3): Borrowers who have other debt at high interest rates might rationally select an interest-only option on their first mortgage so they can accelerate repayment of the more costly debt. If the rate is 5% on the first mortgage and 8% on the second, it makes sense to allocate as much as possible to repayment of the second. Interest-Only ARMs: The interest-only option on ARMs presents special problems. If the interest rate on an ARM increases, the payment increase is substantially larger if the payment is interest-only than if it is fully amortizing.
Popular Mortgage Terms
A second mortgage on a property that is not paid off when the first mortgage is refinanced. The second mortgage lender must allow subordination of the second to the new first mortgage. ...
A condominium project with features that lenders view as favorable in terms of their risk exposure on loans secured by individual condo units. The requirements of warrantability include ...
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented. ...
The array of laws and regulations dictating the information that must be disclosed to mortgage borrowers, and the method and timing of disclosure. ...
A lender that holds the loans it originates in its portfolio rather than selling them. ...
In general, a Down payment is a one-time payment a buyer makes to diminish the risks of the seller of expensive goods like a car, or a house. In Real Estate, the home buyer makes a down ...
Someone recommended you should reach out to Freddie Mac and you came here looking for him. No, he's not a registered real estate agent at The OFFICIAL Real Estate Agent Directory ...
Refinancing for an amount in excess of the balance on the old loan plus settlement costs. When the main objective of a refinancing is to raise cash, the relevant question is whether the ...
Interest from the day of closing to the first day of the following month. To simplify the task of loan administration, the accounting for all home loans begins as if the loan was closed ...
Have a question or comment?
We're here to help.