Mortgage interest rates are in a constant state of flux – weekly, daily, and even hourly. When you apply for a mortgage whether you buy a home or refinance, you’re typically afforded a grace period where you’re guaranteed the rate you’ve been pre-approved at. It’s great since mortgage rates can change a lot in the time it takes to close, and that could impact your monthly payment. A conventional mortgage differs from a 10-year interest-only mortgage because a conventional mortgage includes both principal and interest in the monthly mortgage payment from the start, leading to steady equity buildup over time.

For many lenders, your rate lock period is for 30, 45, or 60 days, and it ensures that you won’t lose out on an advertised rate if interest starts to climb. Sounds pretty good, doesn’t it? With a fixed rate mortgage, your interest rate remains the same throughout the loan term, providing stability and predictability, unlike adjustable rate mortgages where the rate can change over time.

What’s even more beneficial to you as a home loan applicant is that you get the lower rate if rates fall. And if rates increase, your mortgage locks in the interest rate you were approved at.

Rate protection or rate lock isn’t a new thing for mortgage lenders to offer. But what MBANC offers with a 10-year Interest Only mortgage could definitely make you view getting a mortgage loan anywhere else differently. MBANC also provides a variety of lending products, including fixed rate and conventional mortgage options, tailored to meet the diverse needs of different borrowers.

What rate lock looks like with a 10-year Interest-Only mortgage

Interest-only mortgages have incredibly enticing perks. You can keep your monthly payment low by paying just the interest portion and keeping your principal amount unchanged—this results in lower monthly payments during the introductory period, but repayment of principal begins after the interest only period ends, causing your payments to increase. They’re an excellent option for professionals who have rising income expectations in the near future, allowing homeownership sooner. The initial monthly payment is lower because you are only paying interest, but once the interest only period ends, you start paying both principal and interest, which increases your monthly mortgage payments.

With a 10-year interest-only mortgage, consider another benefit: the period of time that you have a rate lock expires only at the end of the initial ten years. After the introductory period, repayment of the loan principal begins, and monthly payments will increase accordingly. The longer term of the loan and the structure of interest-only payments can result in more interest and higher total interest charges paid over the life of the loan compared to a conventional mortgage.

They’re an excellent option for professionals who have rising income expectations in the near future, allowing homeownership sooner. However, borrowers should expect higher payments after the interest only period ends and should consider whether they can afford the increased payments and how much interest they will pay over the loan term. During the interest only period, you do not build equity through principal payments, and equity only increases if the property value rises.

A scenario…

Picture this. This scenario is an example for illustrative purposes. You apply for a 10-year interest-only mortgage and are approved today. Let’s assume your interest rate for discussion purposes is 4%. This 4% is the initial rate, and with some adjustable rate mortgages, the rate could reset as often as every six months depending on market conditions. For a mortgage balance of $250,000, you’ll pay approximately $833 per month for the initial 10-year period which accounts for only the interest on the loan amount. This payment structure is typical for a jumbo loan, and interest only loans are often available for jumbo loans but not for conforming loans, VA loans, or FHA loans.

But what happens if the interest rates climb? Say they rise substantially in the next 10 years, doubling to 8%? That could put home affordability out the window if you try to amortize $250,000 at the higher rate when it converts for the following 30 years. The value of the property and any home increases can impact your equity position—without principal payments, equity only builds if the property value rises.

That’s where the rate lock comes into play. Rather than converting to a 30-year mortgage at the market rate of 8%, you’re locked in at the 4% you were approved at. There are fewer options for an interest only loan compared to conventional loans, so borrowers should consider other options and consult with a lender to determine which lending products best fit their needs. And should today’s competitive rates drop at the end of the 10-year interest-only period, it’s possible to lock in at the lower rate.

It makes financial sense for plenty of borrowers like those who have a rising income, a credit score of 700 and above, otherwise low debt-to-income ratio, and those who have substantial cash reserves. Interest-only mortgages are an excellent tool for certain clients looking for jumbo mortgages especially. The benefits of interest only loans can be significant for investment properties, as lower payments may free up money for other investments, but it’s important to have sufficient funds and savings to qualify, and a larger down payment can improve your chances of approval.

Find out more from MBANC

If you are self-employed or have a commission-based pay structure, you’re in the business of leveraging your liquid assets for gains, or you have rising income, a 10-year interest-only mortgage from MBANC should be something you consider. Learn more – contact MBANC today to find out how we can help you achieve your financial goals.