How to Compare Conventional & Interest-Only Mortgages
Having an interest-only (IO) mortgage, your payments for a first period–5 or 10 decades, for instance –are purely curiosity, no principal. As you’re not paying the back, a $150,000 IO mortgage will have smaller payments compared to a $150,000 conventional mortgage. There are several drawbacks, however: The IO interest rate is higher; because you’re not paying off the principal, you’ll pay interest on it for a longer time; and the speed is variable and could rise. Even so, taking an interest-only mortgage might be the smart move for a number of homebuyers.
Figure out the Annual Percentage Rate (APR). Under the federal Truth-in-Lending Act, lenders must translate all the interest and fees you’ll pay for financing into one interest rate to make different loans easy to compare. If you’re considering a selection of loans, the APR will demonstrate how much more you’ll pay for an IO loan. However, Lending Tree says, APRs for variable-rate loans are less dependable as they’re based on predictions of the likely interest rates.
Find out how the rate that is variable is calculated by your lender. These rates are usually indexed to some other figure, like a Treasury-bill speed: Find out exactly what the index is, how frequently it corrects and how large it has risen before. This will give you some idea if the speed in your IO mortgage could rise higher than you can manage.
Look at your investment options. With a conventional mortgage, every time you make a payment, then you boost your investment into your home; if you have an investment that will earn better yields, the Federal Citizen Information Center says, it may be worth it to go with smaller mortgage payments and put the money you saved in to your choice lucrative alternative.
Review your financial situation. If you’re convinced your income will increase in a couple of decades, it may be worth carrying an IO mortgage so you can buy a larger house in your current income. If you’re income is good but inconsistent, Investopedia states–commission revenue, for instance –IO mortgages give you the option to pay principal when you can, instead of having to pay it every month.