With fixed-rate 30-year mortgages at a relatively low rate, you may not be thinking about an adjustable rate mortgage (ARM) or an interest-only ARM. However, an interest only ARM could help you achieve your financial goals, including home ownership and investment.
How does an interest-only adjustable rate mortgage work?
With an interest-only ARM, you’ll get an initial loan period with set monthly interest-only payments. This initial period is usually around five years but can be shorter or longer.
If you have a $500,000 4% interest-only 5/1 ARM, your starting interest-only mortgage payment will be $1,667.00. Your payment will increase after 5 years in this type of mortgage. After 5 years, your payment will increase, reflecting a remaining 25 years of principal repayment and interest. Monthly ARM payments could increase to a potential maximum of $3,772.30 a month, assuming .25% annual interest increases with an interest rate cap of 12%.
Which type of financial and home buying circumstance can fit an interest-only adjustable rate mortgage?
Interest-only ARMS can be a good fit if you have a variable income and cash reserves. If you anticipate that your income will increase over time, you can also be a good fit for an interest-only ARM. Some interest-only ARMs will also allow you to make principal payments besides the interest-only payments during the first years of the mortgage.
Do you plan to stay in the home a short time and are you confident you can sell it without taking a large loss? This is another financial situation that could be a good fit for an interest-only ARM.
If you have enough income to easily cover the mortgage payment when the mortgage adjusts and includes principal and interest payments, and you’re disciplined about your finances, you can invest the principal you would have paid into your mortgage, and keep the difference when your mortgage adjusts.
Work with a qualified, experienced mortgage expert to learn if an interest-only ARM is a good financial choice.