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Debbie Siegel's Mortgage Minute
Interest-Only (I/O) Mortgages - Look Before You Leap!
Sure, an I/O mortgage can help you afford a more expensive property. But
beware: eventually it'll slap you with a much higher monthly payment.
With an I/O mortgage, you don't make any payments on the principal for the
first 10 years. Then, your payment rises, and the payment must cover both
interest and principal for the remaining term of the loan.
Consider, for example, a $300,000 I/O 30-year mortgage when the non-I/O
rate is 6.25%.
First, your lender charges a premium of 0.5% for the privilege of an I/O
mortgage, yielding a rate of 6.75%. You'd pay $1,687/month for the first
120 months vs. $1847/month on a traditional, fixed-rate 30-year mortgage.
* Next 37 17 investors only!
But after ten years, your monthly payment on the I/O mortgage would jump
to $2,281.09 for the remaining 20 years while the other mortgage payment
would remain the same. Why such a big leap? Because you're cramming 30
years of principal payments into 20 years. If your income hasn't risen
sufficiently over the preceding decade, you might struggle.
An I/O mortgage might make sense if you:
- Intend to sell the property within ten years
- Feel confident about boosting your income
- Believe that interest rates are falling, so you can refinance at a more
attractive rate before the interest-only period ends
But buyer beware: Even in these specific situations, I/O mortgages can be
risky. As always, consult a financial planner or mortgage
professional to ensure that the product you choose is tailored to your
circumstances.
Got questions about real estate financing? Contact
Debbie@westchester-mortgage.com
or 617-965-1236. She'll consider them for
inclusion in a future column. Debbie Siegel is president of Westchester
Mortgage in Newton, Mass. She is licensed in several Northeastern states.
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