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Learn How Interest-only Mortgages Work And How They Can Help You

Jan 24, 2008
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.

This interest on this type of loan is based on the treasuries average index. The treasuries average index is among the most stable of all the different indexes used for mortgages. By using this index, your mortgage payment doesn't suffer too much fluctuation during its lifetime.

Almost all interest-only mortgages have a period of 5 years before the first payment recast. After the first 5 year period, loans have a 5 year payment recast. After the first 5 years, a computation is done to get to the needed payment to repay your mortgage in 25 years.

For example, a MTA mortgage of $400,000 in which after 5 years there's been an accumulation of $30,000 in deferred interest will have a new balance of $430,000 amortized over the remaining 25 years. So, if your payment started at 1% or $1,286 per month, in year one and rates were at 6.75% or higher, after year five, your new payment would be 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. The minimum monthly payment option - It's the lowest payment a bank will accept. It usually creates accrued interests.

2. Interest-only payment - It's equal to the interest expense for that month. When you make this payment, the balance in your mortgage won't change.

3. Full principle and interest - The same payment you would make in a 30 year fully amortized 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.

If there are interests that haven't been paid, they are added to the balance of the mortgage. If you choose to, you can pay the deferred interest whenever you can or want.
About the Author
About the author: Igor Buces is a Miami mortgage broker working to help people find the right mortgage through individualized advice and informational articles at his Miami mortgage home page.
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