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Interest-only loan vs. Traditional funding

Interest-only loan vs. Traditional funding

Posted: Dec 13, 2005 12:00 a.m. ET

Final Modify: 12/13/2005

Dear Dr. Don,

I will be thinking about purchasing a true home and wanting to keep my homeloan payment as little as feasible. The mortgage company i will be working with has suggested an interest-only home loan for initial 5 years then refinancing from then on. I’d nevertheless place $500/month towards principal. Would I spend less desire for the long term than if I had struggled using the monthly premiums with the standard home loan right away?

Dear Laurie,

The month-to-month mortgage repayment for a regular fixed price home loan is self-amortizing. This means that the payment per month contains both the month-to-month interest expense and a contribution to principal which allows the home loan become paid down throughout the life of the mortgage.

An interest-only home loan doesn’t always have the key repayment component, at the least perhaps not during the early many years of the mortgage, you to minimize your monthly mortgage payment so it allows. An interest-only home loan can help a home owner be eligible for a larger house or take back funds for any other purposes, like spending.

Interest-only mortgages are generally adjustable-rate mortgages, or ARMs, but they are able to have a hard and fast initial term. Bankrate provides quotes on 3/1, 5/1 and 7/1 interest-only ARMs, but loan providers can offer other choices.