Can you pay interest only without a rate penalty?

Author: Rob K. Blake | Date: October 15, 2008 | Filed In: Mortgage Answers

Here’s the question…

“I am considering an interest-only mortgage. The payment will be less, that I know. Does that mean the rate is less…or is the payment less only because it’s interest only? But are there any other aspects of the mortgage I’m not aware of? It all sounds too good to be true…”

This is a good question and one many seem to forget. Remember, interest-only is what we call a “payment option”. The fact a loan may be “interest-only” doesn’t effect the “type” of loan, only the way it is paid.

So, if you are considering an interest only mortgage, you must look at ALL the terms…not just payment.

That said, when considering “interest-only” payment loans two common practices are utilized.

One, interest-only payment terms are typically only offered on adjustable rate loan programs. So, 3/1, 5/1, 7/1, and 10/1 ARMs were the only programs that would offer an interest-only payment option. That fact gets hidden in most advertising of “interest-only” mortgages.

Next, is more to the root of your question. The “interest-only” payment option comes with a cost…rate bump if you will for the luxury of paying only the interest. So the rate is higher than a standard fully amortized payment mortgage.

So you answer your question…yes, there is a cost…or penalty…to use your word…for take an “interest-only” payment option.

There are other reasons to avoid these payment types, the number one reason…

You never pay off the loan!

What’s the point of buying a house, if you never actually own it?

Thanks for the question…

Good Luck!

Author: Rob K. Blake