Pay Just The Interest For a Preset Period of Time
An interest only (IO) loan allows you to pay only the full monthly interest due on your loan for the fixed period of the loan. During the IO payment period, you’re required to make only the interest payments; the principal remains unchanged. When the IO period expires, you begin paying on the principal too, resulting in an increased mortgage payment.
One unique characteristic of an interest-only loan is that you may elect to make either the minimum monthly payment (the interest-only portion), or, at your discretion, additional payments to be applied to principal to reduce the principal balance. Doing so will reduce your minimum monthly payment in the following month, because the minimum payment will be recalculated based on the remaining loan principal.
This unique tool is very attractive to borrowers whose income ebbs and flows, as it maximizes cash flow between commissions or bonuses. When income periods are lower, only the interest payment is due. In those periods that your income surges, you can make additional payments towards your principal and lower your future IO payments.
How Low Can You Go?
- Borrowers with short-term home plans who would rather increase monthly cash flow than build equity
- Buyers with the intent to remodel or repair a home and then quickly sell it
- Investors who want to free up cash flow for other investments
- Borrowers confident that their monthly income will increase
- Buyers with inconsistent monthly income
Most lenders will allow you to pay down the principal amount of your loan during the IO period without penalty, but some lenders may have limits on the amount of principal you can pay down during this initial period. Our loan advisors at American Pacific Mortgage can help you choose the IO loan program that will best align with your principal payment plans.
An Interest Only loan is a unique program that will offer good benefits to the right borrower, but it may not be right for everyone. If paying your house off quickly is your top priority, the IO loan is not for you. Let us help you select the home loan that works for your individual home goals.