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Mortgage Interest Only

Mortgage Interest Only

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Published by anteras
Mortgage Interest Only
Mortgage Interest Only

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Published by: anteras on Oct 29, 2008
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06/16/2009

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Interest-Only MortgagePayments andPayment-Option ARMs — 
 Are They for You?
Board of Governors of the Federal Reserve System
Board of Governors of the Federal Reserve SystemFederal Deposit Insurance CorporationNational Credit Union AdministrationOffice of the Comptroller of the CurrencyOffice of Thrift Supervision
 
Interest-Only Mortgage Payments and Payment-Option ARMs
|1Owning a home is part of theAmerican dream. But highhome prices may make thedream seem out of reach. Tomake monthly mortgage pay-ments more affordable, manylenders offer home loans that allow you to (1) pay only theinterest on the loan during the first few years of the loanterm or (2) make only a specified minimum payment thatcould be less than the monthly interest on the loan.Whether you are buying a house or refinancing your mort-gage, this information can help you decide if an interest-onlymortgage payment (an I-O mortgage)—or an adjustable-ratemortgage (ARM) with the option to make a minimum pay-ment (a payment-option ARM)—is right for you. Lenders havea variety of names for these loans, but keep in mind that withI-O mortgages and payment-option ARMs, you could face
I
 
 payment shock.
Your payments may go up a lot—as much as double or triple—after the interest-onlyperiod or when the payments adjust.In addition, with payment-option ARMs you could face
I
 
negative amortization.
Your payments may not cover allof the interest owed. The unpaid interest is added toyour mortgage balance so that you owe more on yourmortgage than you originally borrowed.
 
2| 
Interest-Only Mortgage Payments and Payment-Option ARMs
Be sure you understand the loan terms and the risks youface. And be realistic about whether you can handle futurepayment increases. If you’re not comfortable with these risks,ask about another loan product.
What is an I-O mortgage payment?
Traditional mortgages require that each month you pay backsome of the money you borrowed (the principal) plus the inter-est on that money. The principal you owe on your mortgagedecreases over the term of the loan. In contrast, an I-O paymentplan allows you to pay only the interest for a specified numberof years. After that, you must repay both the principal and theinterest.Most mortgages that offer an I-O payment plan have adjustableinterest rates, which means that the interest rate and monthlypayment will change over the term of the loan. The changes may be as often as once a month or as seldom as every 3 to 5 years,depending on the terms of your loan. For example, a 5/1 ARMhas a fixed interest rate for the first 5 years; after that, the ratecan change once a year (the “1” in 5/1) during the rest of theloan. More information on ARMs is available in the FederalReserve Board’s
Consumer Handbook on Adjustable Rate Mortgages
.The I-O payment period is typically between 3 and 10 years.After that, your monthly payment will increase—even if interestrates stay the same—because you must pay back the principal aswell as the interest. For example, if you take out a 30-year mort-gage loan with a 5-year I-O payment period, you can pay onlyinterest for 5 years and then both principal and interest over thenext 25 years. Because you begin to pay back the principal, yourpayments increase after year 5.

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