Learn About The Popular Interest-only Mortgages And How They Work
Interest-only mortgages also known as MTA loans) are very used very often by new homeowners. It’s to your advantage to know how they work so that you can decide whether it is good for you to apply to one of such loans.
Interest-only mortgages rates are based on the treasuries average index. This index is one of the most reliable indexes in the market. By having your loan linked to this index, you can be fairly assured that your mortgage payments will stay very stable.
Almost all MTA loans have a 5 year payment recast. After the first 5 years, a calculation is performed to come up with the necessary payment to repay the loan over the remaining 25 years. This is done by adding any deferred interest you didn’t pay during the first five years to the remaining loan balance.
For example, a loan for $400,000 with accrued interests after 5 years equaling $30,000 will have a balance of $430,000. This balance must then be paid in 25 years. If when you got the loan, you had a monthly payment starting at 1% ($1,286/month) in the first year and the interest rate was 6.75%, you’ll have a new monthly payment of around $2,970.
The biggest advantage of interest-only loans is the flexibility you have because you have the chance to choose among one of four different monthly payment options. These are the four options you can choose from:
1. Minimum payment option - The minimum payment accepted by the bank. In most cases it will create deferred interests.
2. Interest only payment option - The payment is equal to the interest owed for that month. There isn’t a reduction of the balance of the home loan.
3. Full payment - This is the payment you’d have if your loan was a fixed 0-year loan.
4. A 15 year amortization payment - It’s the largest payment and the one that reduces your balance in your loan the fastest. It’s calculated as a regular 15 year mortgage.
If you decide to make the lowest payment, some of the interest will be deferred. A deferred interest occurs when your payment is lower than the interest expense for that month.
Any unpaid interest is added to the current balance of the loan. However, you can choose to pay this deferred interest anytime you are able to. If by any reason you are late on your payments, you will be required to pay the total amount owed.
About the Author:
About the author: Igor Buces is a Miami mortgage broker working to help people find the right mortgage through individualized guidance and informational articles at his Miami mortgage home page.
