The Interest Only Mortgage is exactly as the name implies. The loan payment is calculated by applying the rate to the outstanding principal balance. These loans are typically set up as ARMs, however, you can also get a 30-Year fixed rate mortgage with the first 10 years consisting of Interest Only payments.

These loans can be based on many different indexes, however, the most conservative are based on the Treasury Index or the LIBOR Index. Interest Only Mortgage payments have a payment minimum. If a borrower chooses to pay the minimum, then they will never reduce there principal amount owed.

The only way to lower the principal amount owed is to pre-pay an additional amount with every payment and have the additional payment credited towards principal reduction. Also remember that most Interest Only Mortgages have a maximum period for the interest only period.

This period can be as short as 60-months but usually never longer than 120-months. After this ‘interest only’ period the loan is amortized for the balance of the mortgage. This balance is calculated as the time difference between the interest only period and 30 years. So in a loan with 120 months (10-Years) of interest only payments, there would be 20 years of amortized payments after the interest only period.

Who should apply for this type of loan? The Interest Only Mortgage is great for loans with high balances on homes that are in markets with rapid appreciation. The payment savings can be substantial.

Consider this scenario, on a $250,000 loan balance with a standard 30-year fixed rate mortgage at 6%, the principal and interest payment would be $1,492 per month. On a 3/1 Interest Only ARM with a 4.75% rate the interest payment would be $990 per month. That is a savings of approximately $500 per month. On Jumbo Mortgages the savings are even more pronounced.

Final Note:   Remember these important tips when obtaining an Interest Only Loan;

 There is no principal reduction, so make sure that you are located in a market with appreciating values and that you know how your mortgage financing fits into your overall investment plans and goals. Interest Only Mortgages are best for loans with high balances and on homes that are located in markets with rapidly appreciating home values.

Watch out for pre-payment penalties. These loans are considered an ARM instrument and many ARMs have hidden prepayment penalties. Interest Only Mortgages come in 1-month, 6-month, 1-year, 3-year, 5-year and 7-year, 10-year ARM style loan programs and some lenders carry a 30 year fixed with the first 10 years as interest only as well.

One final comment… Interest Only loans are considered to be ‘exotic’ mortgages.  They should only be used with the advice of a financial planner or CPA’s advice.  Not seeking council before pursuing this type of loan is just like going to Vegas and rolling the dice!

1-Month, 6-Month, 1-Year, 3/1, 5/1, 7/1 & 10/1 Treasury or Libor ARMS:     The Adjustable Rate Mortgage, often referred to as an ARM, is a mortgage that has a fixed rate for a limited amount of time and then the rate begins to fluctuate for the duration of the loan.  ARMs are available in many different terms and conditions.  Loans with fixed interest rate periods range from 1-month to 10-years.  At the end of the fixed rate period the rates may start to adjust.  Many of these loans have a cap on the amount of adjustment per year and the amount of adjustment over the life of the loan.

The best ARM products will not adjust more than two percent per year and will have a cap, or maximum adjustment, of five to six percent over the life of the loan.  Most Adjustable Rate Mortgages are amortized over a 30-year period and act similar to the 30-year fixed rate mortgage with regard to principal reduction.

Who should apply for this type of loan?     Many borrowers are good candidates for this type of loan.  These loans typically offer much lower rates than the standard 30-year fixed rate mortgage option and they can offer security during the guaranteed fixed rate period of the loan. 

The prime candidate for this type of loan is the individual that knows how long they will be living in the property.  For instance if a person or family knows that they will only be in the home for 5 years, then a 5/1 ARM would be the perfect mortgage instrument.  The rate would be fixed for five years and would begin to adjust at the beginning of the sixth year.  The adjustment of the loan would not matter since the goal is to sell the property before the adjustment period begins.

Final Note:     Some important points about ARMs;

1. The typical fixed rate periods of an ARM are 1-month, 6-month, 1-year, 3-years, 5-years, 7-years and 10-years. 
2. Most ARM products are convertible.  This means when the loan begins its adjustment period, for a nominal fee, the lender will convert the remainder of the mortgage to a fixed rate mortgage at the prevailing market rate.
3. The best/lowest ARM products tend to be based on the LIBOR Index, but the most stable index is the Treasury.  Other ARM types include rates based on the COFI and the MTA.
4. The best ARMs typically have an adjustment cap of two percent per year and five to six percent over the life of the loan.
5. Never, never ever pay a prepayment penalty.  The only people that should accept an Adjustable Rate Mortgage with a prepayment penalty are people with poor credit.  (Typically typified by a Beacon Score of 640 or less.  Other factors may also apply.) – See Non-Prime loans.
6. If financing investment property with this type of loan, it may be necessary to pay a discount point in order to get the loan.  Depending on the financial goals for the investment, paying up to one discount point may be worth the investment.

“Purchasing or refinancing a home is the largest single investment decision an individual or a family will ever make.  It should be a thoughtful, systematic financial decision.  Emotion should only become involved in the financing process after all financial options have been analyzed.”

Click Watch Video or read text below

1. Interest Rates – Bankrate recently reported, that mortgage rates are at their lowest point ever in their survey taking history. They have been conducting rate surveys since September 1985. The national average for a 30 year fixed rate mortgage is very near 5%. This is great news for buyers. If you read or listen to the news, you will see that refinancing has increased dramatically. Why do you think this is? As I’ve mentioned, I am working on several refinances and have locked rates under 5%. Any further rate drops are likely to be minimal. One thing that you can count on, when rates begin to rise, they go up much faster then they go down. The current interest rate alone, is a really good reason to consider purchasing a home.
2. Housing Prices – Everyone knows that housing prices are down in most regions. Do you think prices are going to continue to decline? Perhaps, but most of the decrease is now reflected in today’s prices. Two good reasons to buy.

3. Seller Motivation – Due to the current market conditions, it is pretty easy to identify motivated sellers. In many instances, you can easily find a motivated seller by looking at the property description. Look for keywords such as: “motivated seller,” “make an offer,” or “must sell.” Be sure your agent is on the lookout for consistent price reductions. If you like the property and the seller is motivated, then you should seriously consider making an offer. If you don’t, chances are someone else will and you will have missed your opportunity. Don’t let happen to you.
4. Tax Advantages – Current tax law allows homeowners to deduct interest paid on mortgages and the amount of paid property taxes. If you are paying rent, you do not qualify for these deductions. The federal and California State governments are also offering incentives. The most widely publicized are the Federal $8,000.00 first time home buyer tax credit and the California $10,000 tax credit for a new home purchase. This makes a great opportunity even more incredible. You can find more information at our resource center, www.bayareateamonline.com.
5. Timing – You must have heard the expression “buy low and sell high,” right? It might even be your mantra. As with any investment, it is ideal to purchase when prices are low rather than at their peak. However, if you are waiting to purchase a home because you believe prices will continue to drop, you will likely miss out of an ideal opportunity. The time to “buy low” is right now. Once everyone comes to the realization that prices may already be at their lowest point, then you can rest assured that buyers will jump in and start buying. It might not be a mad rush anytime soon, but the best deals will be the first target.

Now you know, this is a great time to buy a house. There is plenty of inventory, interest rates are low, house prices are down, sellers are motivated, you can take a tax deduction and you may qualify for up to $18,000.00 in tax credits. The timing is perfect. You have nothing to lose and so much to gain.

To further assist you, we’ve added two Rent vs Buy calculators to our Resource Center and
blog site….one is by Freddie Mac the other calculator is by Ginnie Mae. If you decide that buying in the San Francisco Bay Area makes sense for you, I can assist you with locating and financing your home. If renting seems like the right answer and you want to live on the Peninsula I can refer you to the best rental agent I know….

Russ Boyd and his team professionally assist buyers, sellers and homeowners in the Peninsula communites of the San Francisco Bay Area. They have served clients in San Mateo, San Franicso, Santa Clara, Alameda and Contra Costa counties. Licensed as a Real Estate Broker by the California Department of Real Estate, 01264240.

Click Watch Video or read text below

1. Interest Rates – Bankrate recently reported, that mortgage rates are at their lowest point ever in their survey taking history. They have been conducting rate surveys since September 1985. The national average for a 30 year fixed rate mortgage is very near 5%. This is great news for buyers. If you read or listen to the news, you will see that refinancing has increased dramatically. Why do you think this is? As I’ve mentioned, I am working on several refinances and have locked rates under 5%. Any further rate drops are likely to be minimal. One thing that you can count on, when rates begin to rise, they go up much faster then they go down. The current interest rate alone, is a really good reason to consider purchasing a home.
2. Housing Prices – Everyone knows that housing prices are down in most regions. Do you think prices are going to continue to decline? Perhaps, but most of the decrease is now reflected in today’s prices. Two good reasons to buy.

3. Seller Motivation – Due to the current market conditions, it is pretty easy to identify motivated sellers. In many instances, you can easily find a motivated seller by looking at the property description. Look for keywords such as: “motivated seller,” “make an offer,” or “must sell.” Be sure your agent is on the lookout for consistent price reductions. If you like the property and the seller is motivated, then you should seriously consider making an offer. If you don’t, chances are someone else will and you will have missed your opportunity. Don’t let happen to you.
4. Tax Advantages – Current tax law allows homeowners to deduct interest paid on mortgages and the amount of paid property taxes. If you are paying rent, you do not qualify for these deductions. The federal and California State governments are also offering incentives. The most widely publicized are the Federal $8,000.00 first time home buyer tax credit and the California $10,000 tax credit for a new home purchase. This makes a great opportunity even more incredible. You can find more information at our resource center, www.bayareateamonline.com.
5. Timing – You must have heard the expression “buy low and sell high,” right? It might even be your mantra. As with any investment, it is ideal to purchase when prices are low rather than at their peak. However, if you are waiting to purchase a home because you believe prices will continue to drop, you will likely miss out of an ideal opportunity. The time to “buy low” is right now. Once everyone comes to the realization that prices may already be at their lowest point, then you can rest assured that buyers will jump in and start buying. It might not be a mad rush anytime soon, but the best deals will be the first target.

Now you know, this is a great time to buy a house. There is plenty of inventory, interest rates are low, house prices are down, sellers are motivated, you can take a tax deduction and you may qualify for up to $18,000.00 in tax credits. The timing is perfect. You have nothing to lose and so much to gain.

To further assist you, we’ve added two Rent vs Buy calculators to our Resource Center and
blog site….one is by Freddie Mac the other calculator is by Ginnie Mae. If you decide that buying in the San Francisco Bay Area makes sense for you, I can assist you with locating and financing your home. If renting seems like the right answer and you want to live on the Peninsula I can refer you to the best rental agent I know….

Russ Boyd and his team professionally assist buyers, sellers and homeowners in the Peninsula communites of the San Francisco Bay Area. They have served clients in San Mateo, San Franicso, Santa Clara, Alameda and Contra Costa counties. Licensed as a Real Estate Broker by the California Department of Real Estate, 01264240.