30 Year Fixed Loan with Interest Only
Posted on August 8, 2007 - Filed Under Business |
In our information world, it is very easy for something to slip by and never be noticed. There’s just too much. One such nugget, which I should have known about, escaped my field of vision.
I hear so much about three big loans: 30 year fixed, 5 year ARM and the 7 year ARM. But I had never heard about a 30 year fixed loan with an interest only period.
How it works: it’s a 30 year loan at a fixed interest rate. The interest only period lasts for either 10 years or 15 years. At the end of the interest only period, the principle is amortized based on the remaining 20 years or 15 years (based on the program). But the interest rate is locked for the entire 30 years.
The numbers intrigued me (borrowed from here): $300,000 loan at 6%.
| Year | Monthly Payment ($) |
|---|---|
| 1 | 1500 |
| 10 | 2150 |
The difference between the interest only period and the P&I period is $650/month. At first, this number made me pause. But then I realized that this is $650/month over a 10 year period. This means if the borrower is sitting in a $40,000/year job they would have to get a 3% pay raise per year in order to increase their income to support the increased payment of their mortgage.
Or they could do the unthinkable and change jobs.
If you’re not getting a 3% pay raise, you must work where I work.
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7 Responses to “30 Year Fixed Loan with Interest Only”
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I have 2 of these loans right now. Hopefully in 10 years, I’ll be able to refi or sell.
This is an intriguing financial instrument. I like the idea and being able to get in at a lower payment with the thinking that 10 years from now you’ll (hopefully) be making more money. Of course, with the $300K example given, we’re not talking about CA, unless someone has a 50% down payment.
You might have a hard time getting something like that now.
Thanks for visiting Mortgage Porter. Since I’ve written that post, qualifying for that mortgage is not based on the interest only payment. You qualify at the fully amortized payment (PITI).
I generally do not advise this mortgage unless you are planning on selling in 10 or 15 years (if you’re opting for the 15 year interest only version).
Kenric, it’s really a shame I can’t plug my head into a machine like the Matrix and just learn everything.
Engineer, a quick search on yahoo real estate for all homes in the LBC less than $300,000 came up with 100+ listings.
Moom, why do you say that? I know 100% financing is disappearing and sub-prime lenders are tightening credit scores. But this loan program is a bonafide Fanny Mae loan. Too much info passing me by.
Rhonda, thanks for stopping by! My objective: disseminate information. I leave all the details to the actual experts.
But you hit on the point: I know of no one who plans on keeping a property for 30 years.
A couple of things to consider.
If this $300k loan was done using a standard 30 year fixed rate mortgage then the payment would be about $1,800 per month, as opposed to the $1,500 per month that you pay using the interest-only structure.
Add to that the fact that in ten years the 30 year fixed would have paid off about $50k in principal, whereas the interest-only structure still owes the full $300k.
I tend to be a bit leery of financial instrumetns that make investments more “affordable”. If the investment is solid enough to yield good economic results w/ a 30 year fixed it might be a bit dodgy.
I just got a loan like this too. In fact, I wanted the 30 year fixed P&I but when I got to the closing table, it said 10 years interest only. I was surprised but took it because it was the better choice.
And 3% is inflation - you better be getting at least that per year for a raise, or just switch companies and get 15% in one shot.