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Interest Only Loans - FAQ

 

Many people are hearing the words Interest Only for the first time and what better way to build a more comprehensive website than by asking the very people who want this information.  The following are answers to some of the more popular questions we have received.

bullet What will my margin be when the fixed rate is over?
bullet What Index will my interest rate be tied to?
bullet Can I convert to a fixed rate?
bullet Are these Balloon Mortgages?
bullet Do Interest Only Loans have Prepayment Penalties?
 

 

What is your margin when the fixed rate period is over?

This really depends on the lender and the product offered.  Variable rate mortgages are based on a number of factors to asses the lenders particular risk profile for the program. What does this mean to you?  It means once your initial fixed rate period is over you will be subject to the measured index of your mortgage product plus a pre-defined margin.

What Index will my Interest Rate be adjusted to?

Most Interest-Only loans are tied to the LIBOR index - LIBOR is an abbreviation for "London Interbank Offered Rate," and is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity - however some are also tied to the one year CMT.

Can I convert to a fixed rate?

Interest-Only loans do not generally have fixed rate conversion options but product features and guidelines change daily.

Are these Balloon Mortgages

No.  Most Interest-Only loans are not balloon type mortgages.  Those that have a longer initial fixed period such as the 3,5,7 and 10 year  programs will not have the note due and payable at the end of the fixed term.  The mortgage will simply turn into a fully amortized loan thus your balance (after 5 years on a 5 year fixed interest only loan) will be amortized over the remaining 25 years as a normal 25 year "principal and interest" mortgage would except at an adjustable rate.

Do Interest Only Loans have Prepayment Penalties - If so, How do they work?

Most Interest-Only loans do not have prepayment penalties however there are certain advantages to taken a prepayment penalty.  The option will depend on your application profile and the lender you choose but you may be able to save up to 0.25% on the rate just by taking a prepayment penalty for the first 3 years.

 
 
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