Question:

How to choose the best IO home loan based on the interest only mortgage schedule?

Answer:

IO mortgages simply have an IO monthly payment option and there is a variety of loans that can have it. Here is what you need to know and compare about different IO home loans and find it on the interest only mortgage amortization schedule.

Is your Interest Only loan adjustable or fixed rate?

  • If it is fixed rate, your rate will stay the same for the IO term and for the remaining part of the loan.
  • If it is adjustable interest-only loan you have to check how long the introductory rate will hold (if any), and how often will the rate adjust afterwards.

    Adjustment and yearly caps are also important.

    An IO ARM amortization schedule should show scenarios for monthly payment increase if the rate goes up. Pure interest-only ARM loan monthly payment can go up significantly; you won't be paying principal at all and could still be making even larger payments than with a standard fixed rate mortgage (FRM).

  • For both types, you need to know how long IO and/or minimum payment options are available. When this period expires, your loan will be recast (that is, recalculated) and fully amortizing options will kick in.

Compare only mortgage loans for the same loan amount and same IO/minimum payment period.

For example, consider a loan of $300,000 for any of the following types:

  • Standard 30-year FRM;
  • 30-year fixed rate with IO;
  • Fixed rate 3/1 FRM;
  • 3/1 pure ARM;
  • 3/1 IO ARM;
  • 3/1 Option ARM with minimum and interest only option.

Basically, what you need to know for a start for each of those loans to make a valid choice is:

  1. How much is the fully amortizing/minimum/IO monthly payment going to be for those first 3 years (or in the 1st and 36th month)?
  2. How much is the payment going to be in year 5 (or in the 60th month of the mortgage), considering adjustment caps?

This is enough to look for on your IO loan amortization schedule to decide whether you want the loan and which option best suits our personal needs.

This information will be available online. Make sure you shop enough before you make a choice. If you don't feel comfortable mortgage shopping on your own, consult a mortgage professional or finance advisor. Interest rates for your personal circumstances will be different, but a general payment and rate comparison.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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