You know, with phrases such as the title above, and the myriad of paths the mortgage manufactures runs us down, it's no wonder that the average buyer becomes lost in the process. Then, the mortgage store adds this new diminutive product called the interest only loan, and presto, additional confusion. Add to this fact that the interest only loan selection can be added to roughly any mortgage product already in existence, and you have total chaos.
Well, let's take this puzzle apart, one piece at a time. The first piece to examine is the basic loan product: an Adjustable Rate Mortgage or Arm. An adjustable rate mortgage provides the buyer with a mortgage that allows the interest rate to be adjusted at mutually agreed upon times. This means for the consumer, if the interest rate goes down, they can get a better rate. For the lending convention it means if the interest rate goes up, they get a better return on their investment. It's usually a win-win situation. The buyer ordinarily gets a better interest rate on the front end, with the guarnatee that is the interest rate doesn't just explode; they'll get to keep a great rate.
Now, a 5 year Arm means that the interest rate is locked in for five years. When you add the "1" to the equation, it means it's a 1% interest only Arm for 1 month; the interest only loan selection at 1% is good for the first month, then the interest only selection at a general interest rate is due for the next five years of the loan, after that point in time, the interest rate may change, and the payments will begin to comprise considerable and interest.
The only other element to define is the interest only loan option. On an interest only loan, only the interest is paid for a specified period of time. Nothing applies to the principal; the only part that the buyer pays of the mortgage loan is the interest. That is an interest only loan.
Okay, that makes it more no ifs ands or buts understood. But is it a better deal for the buyer today? I am inclined to disagree that an interest only loan selection is the best selection for any consumer, other than just a small handful, and we're not discussing those borrowers in this article. The interest only loan, either it's tied to an Arm, or an Frm, is never a good idea when you want to pay for your home, and retire in that same home. This type of buyer comprises about 65% of the store today. So, for the vast majority, an interest only loan of any kind is not your best bet.
What is a 5/1 Arm?
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