What is an Interest-Only Loan?

An interest-only loan is a loan in which for a set term (3, 5, 7, or 10 years) the borrower pays only the interest on the principal balance. In the United States, a five or ten year interest-only period is typical. After this time, the principal balance is amortized for the remaining term. In other words, if a borrower had a thirty year mortgage and the first ten years were interest only, at the end of the first ten years, the principal balance would be amortized for the remaining period of twenty years. The practical result is that the early repayments (in the interest-only period) are substantially lower than the later repayments. This enables a borrower who expects to increase their salary substantially over the course of the loan to borrow more than they would have otherwise been able to afford.

Are you a good fit for an Interest-Only Loan?

• Income is primarily attained from Commissions and/or Bonuses
• Your higher Income earning years are a few years away, however you wish to maximize your buying power now
• You will invest my monthly payment savings in higher interest returning investments
• This will not be the last home I will live in, I want my payment as low as possible
• You plan on retiring soon and you want the lowest payments possible WITHOUT negative amortization

What would my monthly Interest-Only payment be?

The formula:  (Loan Amount) X (Interest rate in decimal format) / 12 (Months in a year)

Example:    

• Loan Amount of $450,000
• Interest Rate of 6.25%
• Term: 5 Year Interest-Only

The math:  450000 x .0625 / 12  =  $2,343.75 <-- Your monthly payment

How does this example compare to a fully amortized loan?

• Loan Amount of $450,000
• Interest Rate of 6.25%
• Term: 30 year fixed (fully amortized)

The monthly payment is $2,770.72

What should I do with my monthly savings of $426.97?

• Invest more $$ into your employer's matching 401k retirement plan
• Set aside more $$ for your children's College Fund
• Pay down Credit Card Debt
• Invest in the Stock Market or other Higher Return Investments