Cash Flow Control, Interest Only Payment Loans

by: John R. Blakefield

Another option for a mortgage? You shouldn't be so surprised. Interest only payment mortgages can get you into a home.

There are so many options for people to buy a home today. The financing continues to get even more creative as lenders continue to help as many people as possible get into a new home. This can be great from a quick glance, but you must be careful not to get into a situation that the mortgage is too creative for you to pay every month. Many people go into a deal thinking they are doing the right thing for their situation, but only falter on payments because it is just too much money and the equity is being stripped from the home!

Regarding the normal financing, you have the options of adjustable rate mortgages, which have an interest rate that changes the monthly payment every few years depending on the terms of the mortgage, and fixed rate mortgages that have a steady interest rate throughout the entire length of the life of the loan, and of course the more risky balloon mortgage which allows you to pay a low monthly payment, if one at all, and then pay off the debt at the end of the life of the loan in one large lump sum.

The creativity comes in by adjoining two types of mortgages. For example, you may have a split mortgage where for the first 5 years of a loan you have a straight fixed rate mortgage, but then after those 5 years, you move into a fluctuating, less stable adjustable rate mortgage. Lenders will mix and match, combine and separate to negotiate all terms regarding a mortgage.

The only way to be certain that a certain mortgage is right for you is to calculate the monthly payments and total expenses, including all fees and the possibility of a prepayment penalty. And watch out for those prepayment penalties! They can only charge them if you agree to them, so be sure to read all fine print carefully to see how much a prepayment penalty really is. If you catch it and it was not discussed, be sure to have a talk with your lender to get the terms corrected.

Interest only payments allow you to pay only the interest on your mortgage for the first few months, usually keeping the monthly payment very low. This can allow you to control your cash flow in the beginning, so that buying a home isn't such a huge shock to your finances.

(You should, however, be prepared to buy a home before you do it so hopefully it won't be a huge shock to your finances.)

This additional cash flow can be used for other things such as paying off consumer debt or addressing unforeseen expenses such as medical bills or a pay cut.

During the interest only payments, which are lower than what would be your normal monthly payment, you are not paying anything towards the principal- the entire loan amount previously agreed to by you and the lender. However, you can make a principal payment in which your next interest only payment would be based on a lower principal amount.

Now, the interest rate can still be adjustable or fixed depending on the terms. I am sure you will find lenders that will be creative with this as well.

Interest only payment mortgages are not good for those who wish to build the equity quickly in their home. This is for people who need to control their cash flow or have other reasons as to why they should not pay any principal payments. However, it is still an option and maybe it is just what you are looking for. Always be clear on the terms before you agree to any financing.

About The Author

John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: http://www.scourtheweb.com/mortgage/.

This article was posted on April 19, 2006





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Flexible Payment Mortgages

by: LendingTree Editorial Staff

With most mortgages, your payment is the same every month. But what if your paycheck isn’t so regular? Would you like to be able to vary your mortgage payment depending on your cash flow? An option ARM -- also called a flex-ARM or pick-a-payment loan -- allows you to do just that.

How does it work?

An option ARM is an adjustable-rate mortgage with a twist. You don’t pay a set amount each month. Instead, the lender sends a monthly statement with up to four payment options. You simply choose the amount you want to pay that month and then submit your payment.

The options vary, but here’s the most common menu:

Minimum payment: This is calculated using an “initial” interest rate that can start as low as 1.25 percent. Because this payment is so low, it’s useful for months when you don’t have much cash on hand, perhaps because you are waiting for a commission or bonus check. But any unpaid interest gets deferred, or added to the principal of the loan, so your principal grows.

Interest only: You pay all the interest due, but none of the principal. This doesn’t reduce your mortgage balance, but it allows you to avoid deferring interest.

30-year amortized: This matches the monthly payment of a mortgage amortized over 30 years at your current interest rate. It includes both principal and interest.

15-year amortized: The same as above, but amortized over 15 years. This is the highest monthly payment. Choosing it allows you to reduce your principal faster than any other option.

The fine print

The biggest caveat with option ARMs is that those enticing initial rates are short-lived. The low minimum payments that make these mortgages so attractive can increase dramatically. In addition, every five years, the loan is recast -- that is, a new amortization schedule is drawn up to ensure that the remaining balance will be paid off by the end of the loan’s term. When that happens, the minimum payment can be pushed even higher.

What’s more, if you defer too much interest, you can reach what’s called negative amortization. If your balance grows to 10 percent to 25 percent (depending on state law) greater than the original principal, your loan is automatically recast and you have to start paying the fully amortized rate, which will increase your monthly payments.

Another potential downside of option ARMs is that they’re more complicated than most other mortgages. Home buyers may be seduced without fully understanding how much the minimum payments will increase over the long-term. When the monthly amounts go up, these people can experience payment shock.

To learn more about flexible payment mortgages, visit http://www.lendingtree.com/cec/yourhome/yourmortgage/open-arms.asp

About The Author

The editorial staff at LendingTree is committed to helping consumers become smarter borrowers. Visit http://www.lendingtree.com/cec for more information and tips on buying, selling, and financing a home. Copyright 1998-2006, LendingTree, LLC.

This article was posted on April 19, 2006






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