An interest-only loan is a loan in which, for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the interest-only term the borrower may enter an interest-only mortgage, pay the principal, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option.
Types of Interest Only Home Loan Programs
One Year Libor Loan – fixed for 1 year
The interest rate on this loan is the sum of the LIBOR index plus a margin rounded to the nearest one-eighth of one percentage point, (0.125%). The margin will not change throughout the term of the loan however the index value will be adjusted on an annual basis which will cause your interest rate to be adjusted accordingly.
Libor loans are based on either a fixed or adjustable rate tied to the Libor Index. We’ll list some of those here, other interest only loans with other indexes are similar in terms and functionality.
3 Year Interest Only Arm – fixed for 3
The interest rate is fixed for the first three (3) years of the loan term and your only obligation are interest only payments. During years 4 thru 30 the interest rate is adjusted every year to the sum of the appropriate index plus a pre-defined margin rounded to the nearest one-eighth of one percentage point – (0.125%). The margin will not change throughout the term of the loan however after the initial period has passed (month 37) the unpaid balance is fully amortized over the remaining term and the borrower is now obligated to make principal and interest payments to the lender.
5 Year Interest Only Arm – fixed for 5
The interest rate is fixed for the first five (5) years of the loan term and your only obligation are interest only payments. During years 6 thru 30 the interest rate is adjusted every year to the sum of the appropriate index plus a pre-defined margin rounded to the nearest one-eighth of one percentage point – (0.125%). The margin will not change throughout the term of the loan however after the initial period has passed (month 61) the unpaid balance is fully amortized over the remaining term and the borrower is now obligated to make principal and interest payments to the lender.
7 Year Interest Only Arm – fixed for 7
The interest rate is fixed for the first seven (7) years of the loan term and your only obligation are interest only payments. During years 8 thru 30 the interest rate is adjusted every year to the sum of the appropriate index plus a pre-defined margin rounded to the nearest one-eighth of one percentage point – (0.125%). The margin will not change throughout the term of the loan however after the initial period has passed (month 85) the unpaid balance is fully amortized over the remaining term and the borrower is now obligated to make principal and interest payments to the lender.
10 Year Interest Only Arm – fixed for 10
The interest rate is fixed for the first ten (10) years of the loan term and your only obligation are interest only payments. During years 11 thru 30 the interest rate is adjusted every year to the sum of the appropriate index plus a pre-defined margin rounded to the nearest one-eighth of one percentage point – (0.125%). The margin will not change throughout the term of the loan however after the initial period has passed (month 121) the unpaid balance is fully amortized over the remaining term and the borrower is now obligated to make principal and interest payments to the lender.
10/30 Year Interest Only – fixed for 10
30 Year Fixed Rates (10 Years Interest Only) – A fixed rate for 30 years where the first 10 years are interest only payments. After the initial period has passed (121st month) the unpaid balance is fully amortized over the remaining term of the loan however the interest does not change. Most lenders allow the borrower to make voluntary principal payments during the interest only period
15/30 Year Interest Only – fixed for 15
30 Year Fixed Rates (15 Years Interest Only) – A fixed rate for 30 years where the first 15 years are interest only payments. After the initial period has passed (181st month) the unpaid balance is fully amortized over the remaining term of the loan however the interest does not change. Most lenders allow the borrower to make voluntary principal payments during the interest only period.
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