With all of the fallout of the subprime market and the bad press on ARMs, Option Arms, and Interest-Only loans, it seems like the only good option nowadays is the traditional 30-yr fixed principal and interest mortgage. Rates are still at relatively low levels hovering around the 6% mark.
It is true that a 30 yr fixed principal and interest mortgage is the safest bet, but I think homebuyers should also give some thought to the 10 year interest-only 30 year fixed mortgage. This is one of the only loans available that gives you a fixed-rate with an option to make interest-only payments when you want to. How is that? Well, an interest-only loan does not restrict you to making only interest payments. You can make payments to principal at anytime.
For example:
A $400,000 mortgage with a 6% interest rate, yields a principal and interest payment of: $2.398.20 per month. The interest only payment would be: $2,000.00.
In this example, a homeowner could acquire a 30 yr fixed mortgage, with a 10 year interest-only option. They can then proceed to make principal and interest payments of $2,398.20 every month. During certain months where they either need extra cash or are tight on cash flow, they can make the $2,000.00 interest-only payment. If they had a 30 year fixed mortgage, without the interest-only option, they would not have this flexibility (I don't think their lender would appreciate them doing that :)
Now, this scenario is targeted to the disciplined mortgage holder. At the end of the 10 year period, the loan has to be recalculated so it could still be paid off within the remaining 20 years. So, each interest-only payment will ever so slightly increase your new mortgage payment at the end of the 10 year interest only period. So 10 years of interest-only payments would result in a new principal and interest payment of $2,865.72 for the remaining 20 years. This is not because you had some negative amortization or deferred interest as with PayOption Arms, it is because your principal balance of $400,000 has stayed the same and now you must payoff that balance in 20 years instead of 30 years. But in reality, most people would refinance their mortgage or sell their home within that period.
So in my option this interest-only loan is not bad if you are disciplined. One nice feature of this loan is that it does not have an interest rate that varies because it is tied to a market index. If you are in the market to buy a home, consult with your mortgage professional to see if this loan is right for you.
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