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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.
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:
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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