Take an Interest-Only Option?

ARMs and 30-year FRMs may offer an interest-only option, where the required payment during an initial period, in most cases 10 years, covers only the interest. At the end of that period, the payment becomes fully amortizing to pay off at term.

But you pay for the option in a higher rate or points, and making smaller payments in the early years means making larger payments in the later years.

The interest-only option was quite popular prior to the financial crisis, much less so today because the price premium paid for the option has become much larger. If the higher rate on a loan with an interest-only option results in a payment that is not significantly lower, there is no point to it. The professor does not list interest-only loans if there is no significant reduction in the payment.

Note: An expectation that you won't have the mortgage very long is not a good reason to select an IO. In that situation, you want a high-rate /rebate mortgage, as indicated in Choosing Among Rate/Fee Combinations.

Additional Reading: "Interest-Only Mortgage Tutorial

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