|
To illustrate the difference between the two, let's start with a $100,000 mortgage at 6.5% for 30 years. The principal and interest payment would be $632.07 for the next 360 payments. To get a 30 year fixed, with a 10 year interest only option, you will pay about .250 to .375% higher on the rate. The same $100,000 loan @ 6.875% will cost you $572.92 interest only for the first 120 payments. The remaining 240 payments will be $767.81. If you kept both loans for the entire 30 years, you would pay $25,479.60 more with the interest only option. The 30 year fixed with IO option could be a reasonable mortgage choice. Other products such as 3/1 IO-ARM, 5/1 IO-ARM, or7/1 IO-ARM carry a much greater risk of extreme payment shock, because the fixed rate period is only 3, 5, or 7 years, and on the 5 or 7 year products the caps for the first rate change can be 5%. A worst case example of a 5/1 IO-ARM starting at 6.000% for the same $100K loan is: $500 interest for the first 60 payments. If the index that the rate is tied to went to hell in a handbasket, the rate could jump to 11.000%, resulting in a P&I of $980.11 for the next 12 months. Even scarier are the Pay-Option ARM's where the minimum required payment is set as though the interest rate was 2% and the accrued unpaid interest is added to the principal balance. Due to the popularity of those products over the last few years, I predict a great number of foreclosures, because the borrowers did not have a clue as to what kind of loan they were getting. I hope I did not cause confusion with my ramblings.
|
