An interest-only loan is a loan in which, for a set term, the borrower pays only the interest portion due on the principal balance. The principal balance remains unchanged. During the entire period of the loan (including the interest only portion), the borrower has the option to make a payment toward the principal in order to reduce the principal balance and in turn reduce the monthly interest payments (automatic recast). At the end of the interest-only term the borrower may choose to refinance to another interest-only mortgage, pay the loan off in full, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option.
At Starr Mortgage Company, we offer a rare opportunity to get an interest only loan without any prepayment penalty or price adjustment to the rate. This is available for 3 year, 5 year, and 7 year fixed period. These loan products are available up to 3 million dollars!
Interest Only Loans for New York City Condos and Coops!
Interest Only Loans in Long Island, Rockland, Westchester and Bergen Counties!
Interest Only Loans are designed for borrowers who are not concerned with immediately paying down the principal balance on a loan, but would rather make full use of the their monthly savings (sometimes thousands per month), and pay down the principal at their discretion sometime down the road. (i.e. after a bonus check is issued for example)
Interest Only Loans vs. Fully Amortizing Loans
The most common types of loans are called “amortizing” loans, which means each payment by the borrower pays the required interest, and a portion of the payment is used to reduce the principal balance. The word amortize is derived from the Latin ad + mors and literally means “to kill” and it refers to the fact that when you make a payment, you “kill” the loan.
An interest-only does not reduce the loan balance at all, but only pays the interest due. A common situation where a borrower would like to obtain an interest only loan would be if he or she wanted to buy a piece of property, make some improvements to it, and sell it. Because most property values in New York City have been rising, these loans are very popular with real estate “flippers” – investors that buy and sell property.
Another common situation for an interest only loan would be for a borrower who receives large bonuses at the end of the year. Many people in the financial services industry who received large bonuses at year end prefer to take advantage of the lower monthly payments that the interest only loan offers. If they choose, they can always pay down the principal at year end. Or they can choose not to pay it down at all. The important thing is that it is YOUR choice and not the banks as to when and how you pay down your loan.
As an example, a 1 million dollar loan at 2.875% (fully amortized) will cost a borrower $4149 per month.
That same exact loan (1 million dollars at 2.875%), (interest only) will cost the same borrower only $2396 per month.
Anyone seeking an interest only loan in New York City should seek out a mortgage professional with many years of experience handling these types of loans. It can be a very effective loan program in many situations.