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
The definition of interest is extremely important in today’s business environment where lending and borrowing money are the power stations of our economy. A widespread definition of ...
One or more persons who hove signed the note and are equally responsible for repaying the loan. When One Co-Borrower Has Much Better Credit than the Other: A problem that arises frequently ...
Administering loans between the time of disbursement and the time the loan is fully paid off. Servicing includes collecting payments from the borrower, maintaining payment records, ...
A government-owned or -affiliated lender that makes home loans directly to consumers. With minor exceptions, government in the U.S. has never loaned directly to consumers, but housing banks ...
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 ...
The portion of the monthly payment that is used to reduce the loan balance. ...
A mortgage that can be moved from one property to another. Ordinarily, you repay your mortgage when you sell your house and take out a new mortgage on the new home you purchase. With a ...
The interest rate or rates and upfront fees paid to the lender and mortgage broker. Some upfront charges are expressed as a percent of the loan, and some are expressed in dollars. The ...
A mortgage on which interest is calculated daily based on the balance on the day of payment, rather than monthly, as on the standard mortgage. ...
Have a question or comment?
We're here to help.