Interest-only rates
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After the interest only period, how will I know my rate?

Although your loan will be subject to future market rates your margin will not change throughout the remaining term of the loan. Your interest rate will adjust regularly (usually on an annual basis) according to the original terms of the interest-only mortgage note. Let's say your note called for your interest rate to be determined by adding the current LIBOR rate + a margin of 2.25. If theLIBOR libor rate is 2.00% during month 61 you will have a new interest rate of 4.25% until the next adjustment period. It's important to remember that these are now interest and principal payments so your payment may be higher even if your interest rate is lower.

Negative amortization and the truth about interest only loans

There is a common misconception that all interest only loans have a feature called negative amortization. If you think this then you need to read the following because most interest-only loan programs that are available with short term fixed rates DO NOT have negative amortization.

Many loan officers are learning interest-only programs for the very first time and one of the most popular programs over the past few years has been what's known as the COFI or MTA loan. These loans are advertised with rates as low as 1.45% and many do not realize they are not the same as a pure interest-only loan.

First of all, these loans contain the possibility of negative amortization (which common LIBOR loans almost never) and if you are financing above 80% of the value of your home it is almost impossible to secure a second mortgage or home equity loan. If you do, your rate will be something which will make you think about reconsidering your first mortgage. The good news is that almost all LIBOR loans do not have this feature.

Typical program, the 5/1 ARM, IO
5 year LIBOR adjustable rate, interest-only for 10 yrs

- Your initial interest rate is not based on the index plus the margin.  Ask your Loan Officer for the initial interest rate.
- Payments made during the first 120 monthly payments will be applied towards interest only.  These regular monthly payments will not reduce the principal balance during this period.  Any amount above this payment will pay down your principal balance, and your next monthly payment will be based off your now lower principal loan amount due to recasting.
- After 120 months your scheduled monthly payments will be based on the interest rate, loan balance, and remaining loan term. 
- The interest rate is fixed for the first 60 monthly payments, and starting with the 61st payment and every 12 months thereafter, will be determined by adding the index (LIBOR) plus your margin.   First change date CAP is 5%, and 2% per adjustment date thereafter.

More About Interest-Only mortgage loans (page two)

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