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| Real Life Information... on Home Related Topics - Mortgage Information |
Interest-only ARMs
An interest-only (I-O) ARM payment plan allows you to pay only the interest for a
specified number of years, typically between 3 and 10 years. This allows you to have
smaller monthly payments for a period of time. After that, your monthly payment will
increase--even if interest rates stay the same--because you must start paying back
the principal as well as the interest each month. For some I-O loans, the interest rate
adjusts during the I-O period as well.
For example, if you take out a 30-year mortgage loan with a 5-year I-O payment
period, you can pay only interest for 5 years and then you must pay both the
principal and interest over the next 25 years. Because you begin to pay back the
principal, your payments increase after year 5, even if the rate stays the same. Keep
in mind that the longer the I-O period, the higher your monthly payments will be after
the I-O period ends.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
An interest-only (I-O) ARM payment plan allows you to pay only the interest for a
specified number of years, typically between 3 and 10 years. This allows you to have
smaller monthly payments for a period of time. After that, your monthly payment will
increase--even if interest rates stay the same--because you must start paying back
the principal as well as the interest each month. For some I-O loans, the interest rate
adjusts during the I-O period as well.
For example, if you take out a 30-year mortgage loan with a 5-year I-O payment
period, you can pay only interest for 5 years and then you must pay both the
principal and interest over the next 25 years. Because you begin to pay back the
principal, your payments increase after year 5, even if the rate stays the same. Keep
in mind that the longer the I-O period, the higher your monthly payments will be after
the I-O period ends.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
Adjustable Rate Mortgages (ARMS)
The next example shows how a lifetime rate cap
would affect your loan. Let's say that your ARM starts
out with a 6% rate and the loan has a 6% lifetime
cap--that is, the rate can never exceed 12%.
Suppose the index rate increases 1% in each of the
would affect your loan. Let's say that your ARM starts
out with a 6% rate and the loan has a 6% lifetime
cap--that is, the rate can never exceed 12%.
Suppose the index rate increases 1% in each of the
Types of ARMs
Hybrid ARMs
Hybrid ARMs often are advertised as 3/1 or 5/1 ARMs--you might also see ads for 7/1
or 10/1 ARMs. These loans are a mix--or a hybrid--of a fixed-rate period and an
adjustable-rate period. The interest rate is fixed for the first few years of these
loans--for example, for 5 years in a 5/1 ARM. After that, the rate may adjust annually
(the 1 in the 5/1 example), until the loan is paid off. In the case of 3/1 or 5/1 ARMs the
first number tells you how long the fixed interest-rate period will be and the second
number tells you how often the rate will adjust after the initial period.
Hybrid ARMs
Hybrid ARMs often are advertised as 3/1 or 5/1 ARMs--you might also see ads for 7/1
or 10/1 ARMs. These loans are a mix--or a hybrid--of a fixed-rate period and an
adjustable-rate period. The interest rate is fixed for the first few years of these
loans--for example, for 5 years in a 5/1 ARM. After that, the rate may adjust annually
(the 1 in the 5/1 example), until the loan is paid off. In the case of 3/1 or 5/1 ARMs the
first number tells you how long the fixed interest-rate period will be and the second
number tells you how often the rate will adjust after the initial period.
next 9 years. With a 6% overall cap, your payment would never exceed
$1,998.84--compared with the $2,409.11 that it would have reached in the tenth year
without a cap.
$1,998.84--compared with the $2,409.11 that it would have reached in the tenth year
without a cap.
You may also see ads for 2/28 or 3/27 ARMs--the first number tells you how long the
fixed interest-rate period will be, and the second number tells you the number of years
the rates on the loan will be adjustable. Some 2/28 and 3/27 mortgages adjust every 6
months, not annually.
fixed interest-rate period will be, and the second number tells you the number of years
the rates on the loan will be adjustable. Some 2/28 and 3/27 mortgages adjust every 6
months, not annually.
Payment caps
In addition to interest-rate caps, many ARMs--including payment-option ARMs--limit,
or cap, the amount your monthly payment may increase at the time of each
adjustment. For example, if your loan has a payment cap of 7½%, your monthly
payment won't increase more than 7½% over your previous payment, even if interest
rates rise more. For example, if your monthly payment in year 1 of your mortgage was
$1,000, it could only go up to $1,075 in year 2 (7½% of $1,000 is an additional $75).
Any interest you don't pay because of the payment cap will be added to the balance
of your loan.
In addition to interest-rate caps, many ARMs--including payment-option ARMs--limit,
or cap, the amount your monthly payment may increase at the time of each
adjustment. For example, if your loan has a payment cap of 7½%, your monthly
payment won't increase more than 7½% over your previous payment, even if interest
rates rise more. For example, if your monthly payment in year 1 of your mortgage was
$1,000, it could only go up to $1,075 in year 2 (7½% of $1,000 is an additional $75).
Any interest you don't pay because of the payment cap will be added to the balance
of your loan.
A payment cap can limit the increase to your monthly payments but also can add to
the amount you owe on the loan. (This is called negative amortization.)
Some ARMs with payment caps do not have periodic interest-rate caps. In addition,
as explained below, most payment-option ARMs have a built-in recalculation period,
usually every 5 years. At that point, your payment will be recalculated (lenders use
the term recast) based on the remaining term of the loan. If you have a 30-year loan
and you are at the end of year 5, your payment will be recalculated for the remaining
25 years. The payment cap does not apply to this adjustment. If your loan balance
has increased, or if interest rates have risen faster than your payments, your
payments could go up a lot.
the amount you owe on the loan. (This is called negative amortization.)
Some ARMs with payment caps do not have periodic interest-rate caps. In addition,
as explained below, most payment-option ARMs have a built-in recalculation period,
usually every 5 years. At that point, your payment will be recalculated (lenders use
the term recast) based on the remaining term of the loan. If you have a 30-year loan
and you are at the end of year 5, your payment will be recalculated for the remaining
25 years. The payment cap does not apply to this adjustment. If your loan balance
has increased, or if interest rates have risen faster than your payments, your
payments could go up a lot.
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