An interest only ARM is an adjustable rate mortgage in which the borrower pays only the interest on the loan for a certain amount of time. It is usually for a short period, such as one, five, or seven years. The interest rates are currently very low on these loans, but since they are adjustable by the lender without any input from the holder of the loan, a borrower could end up paying far more than they first began paying if lenders raise their interest rates. A loan that begins at 3.50 percent could end up to be 6 or 7 percent, making payments far higher than the borrower may have bargained for. Because these interest only payments do not include any payment toward the principal, the payments are usually very low.
This can be a good option for those who save and invest the money they are not paying each month by eliminating payments on the principal of their home loan. The goal for many people is to earn high interest on the money that they invest with hopes of then easily being able to pay the mortgage when the interest only ARM is over. In addition, borrowers can take another interest only ARM more than one time when one expires. This can equal up to 15 or more years of interest only payments and lots of saved money.
Those who may benefit from this type of loan are young couples who know that their income will increase greatly in the future. This would include highly paid professionals such as doctors and lawyers. Investors are another group who sometimes use the interest only ARM to have cash available to invest in Forex or the stock market. They realize that they can probably make more money with their investments than they would earn by investing in their house. Property investors also use these loans that require much lower payments than regular home mortgages. Using an interest only ARM for these reasons can be risky. If an investor loses the money saved by not paying the principal time and time again, then the ARM may not be a good investment.
Rates for an interest only ARM are around 3.44 to 3.90 percent whereas a 30 year fixed loan currently has interest rates of around 4.83 to 5.03 percent. These loans are available, but they are sometimes difficult to find. In fact, all home mortgages can be difficult to be approved for in the low economy, even for those with excellent credit scores. You will have to pay about half a percent higher rate with an interest only adjustable rate mortgage than a standard ARM that requires principal payments in addition to interest payments.
There are bad credit home loans available, but during the current slow market, they are also hard to find. Some lenders are not loaning to very many customers at this time, much less bad credit applicants. Special lenders specialize in bad credit applications and will sometimes accept people who have bankruptcies, write offs, and other negative marks on their credit record. This group can potentially get a fixed rate ARM for up to seven years. Government and subprime lenders will often loan to those with bad credit through VA or FHA mortgages.
When the short period of paying interest only ARM is over, the borrower begins to pay both principal and interest in regular monthly payments. Unless the borrower’s income has increased substantially or she has had good returns on investments, it could be a financial shock when required to pay much larger payments that include the principal. In addition, there is a chance that the borrower will owe more interest than what would be required for the life of the loan. In this case, additional payments are needed at the end of a loan.