INTEREST
ONLY
Interest Only (I/O) loans are usually fixed for a
specific period of time (i.e. 3-years, 5-years,
7-years or 10-years), then turns into an Adjustable
attached to some sort of Index (6-month LIBOR, 1-Year LIBOR).
Once the loan reaches it’s initial term (3,5,7 or 10 years), payments
will begin to amortize based on the current balance, current rate and remaining
term (example: a 5 year I/O has 25
years left).
The I/O loan pays Interest
ONLY! At the end of the initial
term, the customer will still owe the amount they originally borrowed.
The loan does NOT amortize.
Interest only is easy to figure out.
Take the loan amount, multiply by the rate and divide by 12.
Example: $200,000 @ 6% =
$12,000 divided by 12 = $1000 per month.
If the above loan was a 5 year (60 months) initial
term, the 61st payment would be based on the intial $200,000 loan,
whatever the current FULLY Indexed rate was at that time (see Adjustable Rate
Mortgage) and a remaining term of 25 years.
Example: If the 1-Year LIBOR
index was 3.2% and the margin was 2.75%, the fully
Dan Palumbo, Licensed Mortgage Banker 800-817-8743
Dan is the published author of the Mortgage Loan Officer Training Manual. You may order one by visiting www.mortgagetrainingmanual.com
Licensed Mortgage Banker - New Jersey Department of Banking and Insurance; Licensed by the Pennsylvania Department of Banking; Virginia Licensed Mortgage Lender