Understanding an Interest Only Mortgage Rate

Typically, those who choose to pay only the interest on their mortgages will do so for 5, 10 or 15 years. There are several reasons that people choose to do this, but how do you determine an interest only mortgage rate? It isn’t a good idea to go in to this type of mortgage blindly. The information below will help clarify the details a bit, so that you can make an informed decision.

Realize that you will paying zero toward the principal of your mortgage

When you choose an interest only mortgage, that is exactly what you are doing – paying only the interest. None of your payment goes toward the principal, meaning it will be just as much once the term of your interest only loan ends.

While this sounds a bit strange, there are benefits for some people, such as those who expect their incomes to increase over future years and want to buy more home at the present time than they can actually afford. With an interest only mortgage, the monthly mortgage payment is substantially lower. This is important in a number of situations.

Are all interest rates the same on an interest only mortgage?

No, and this is where many people get confused. Many of these types of mortgages work on an adjustable mortgage rate, which means the interest rate could change occasionally or even monthly.

The fluctuation of the current index rate affects the interest rate on your mortgage. For example, suppose you were to make interest only mortgage payments for a period of 5 years. When setting the terms of the agreement, you will state a preset margin, which will remain fixed throughout the term of your interest only mortgage period. However, the interest rate on the interest only portion of your loan will fluctuate according to the current index rate, usually on an annual basis.

Compare interest rates before you choose a lender

If you do decide to go with an interest only mortgage, compare the interest rates offered by lenders before you sign on the dotted line. By shopping around to see which lenders and brokers offer the best interest rates on an interest only mortgage, you can potentially save thousands of dollars.

It is a known fact that most people sell their homes within a 5 to 7 year time period. If you believe you will sell your home in just a few years, paying toward the principal really isn’t a factor that would concern you as it would someone who plans to remain in their home for 30 or 40 years. Research more about interest only mortgages to ensure it is the right decision for you.