Learn About The Popular Interest-only Mortgages And How They Work
Igor Buces
Interest-only mortgages also known as MTA loans) are very used very often by new homeowners. It's to your advantage to know how they work so that you can decide whether it is good for you to apply to one of such loans.
MTAs interest rates are based on the monthly treasuries average index; one of the most stable indexes in the industry. By having your mortgage "attached" to this index, your monthly payments won't change much during the first five years. The payments are based on an interest rate that ranges from 1% to 2.95%.
Almost all MTA loans have a 5 year payment recast. After the first 5 years, a calculation is performed to come up with the necessary payment to repay the loan over the remaining 25 years. This is done by adding any deferred interest you didn't pay during the first five years to the remaining loan balance.
For example, a loan for $400,000 with accrued interests after 5 years equaling $30,000 will have a balance of $430,000. This balance must then be paid in 25 years. If when you got the loan, you had a monthly payment starting at 1% ($1,286/month) in the first year and the interest rate was 6.75%, you'll have a new monthly payment of around $2,970.
The biggest benefit of a MTA loan is the flexibility that it affords by letting you choose among four different payment options. When choosing a MTA loan, these are the four choices for your monthly payments each month:
1. The minimum monthly payment option - It's the lowest payment a bank will accept. It usually creates accrued interests.
2. Interest-only payment - It's equal to the interest expense for that month. When you make this payment, the balance in your mortgage won't change.
3. The full principle and interest payment - This is the same monthly payment you'd make if you had a regular 30 year mortgage.
4. The 15 year amortization monthly payment option - This is the payment you would make if you wanted to pay your home in 15 years. This is the largest payment of all and the one that reduces your balance the fastest.
If you make the minimum payment every month, some interest would be deferred. Deferred interest, also called negative amortization, occurs when the monthly payment is not enough to cover the interest accrued during the prior month.
Any unpaid interest is added to the current balance of the loan. However, you can choose to pay this deferred interest anytime you are able to. If by any reason you are late on your payments, you will be required to pay the total amount owed.
About the author: Igor Buces is a ( http://www.miamimortgagehome.com/mortgage-broker-lender-company/index.html Miami mortgage broker working to help people get the right mortgage through specialized guidance and educational articles at his http://www.miamimortgagehome.com/ Miami mortgage website.
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