Interest Only Mortgages allow you the flexibility of paying only the interest on your mortgage for a selected number of years. While this results in a lower monthly payment, it does not reduce the principal balance of the loan as it would with an amortizing loan. Because larger portions of the interest due over the life of an amortizing loan (see amortizing loan) is paid in the earlier years, the interest only loan is generally a better option for homeowners who have seasonal income or who don’t expect to stay in their home for more than 5 to 7 years.
Amortization is the process by which loan principal decreases over the life of a loan. With each mortgage payment that is made, a portion of the payment is applied towards reducing the principal, and another portion of the payment is applied towards paying the interest on the loan. In the early years, a larger portion of each payment is devoted to interest and a smaller contribution is made toward the principal. This reverses as the loan matures, with larger portions of the payments going toward paying down the principal and the smaller being applied to interest. This results in the majority of the interest that is due over the life of the loan to be paid in the early years.
Whether you are a first time home buyer, a growing family or a real estate investor, it is important to work with a loan officer that realizes everyone’s needs are different. Delawari Financial prides itself on building strong personal relationships and educating their clients before they decide to commit to a home loan.