Illinois Jumbo Interest Only Mortgage Loans Are Back
The jumbo mortgage market continues to improve, enticing banks, home builders and real estate agents to chase the more affluent home buyer. Interest only jumbo mortgage loans were a relic of the past up until the last several months. Now, the interest only jumbo ARM is back and some lenders are even introducing interest only jumbo fixed rate mortgages.
However, interest only loans do pose a risk to the borrower and only should be used in specific situations. Here is a how a jumbo interest only adjustable rate mortgage typically works:
Let’s use a 7/1 jumbo interest only ARM (adjustable rate mortgage) as an example. For starters, the interest rate on an ARM is typically fixed for a period of time. In this example, the rate is fixed for 7 years and then begins adjusting on annual basis at the start of the 8th year. Usually, there are interest rate caps that limit how high the rate can go after the first adjustment period (start of 8th year), how high it can go on an annual basis and how high it can go over the life of the loan. For this 7/1 ARM, the caps are 5/2/5. So if the rate on this 7/1 ARM is 3.125%, the highest that rate can go at the start of the 8th year is 8.125% which is also the highest it can go over the life of the loan.
Now if this is an interest only ARM, the borrower is only required to pay the interest over the first ten years of the loan, then the loan turns into a fully amortizing 20 year loan. That is why interest only loans are so risky – the rate could be as high as 8.125% in year ten and at that time, the loan has to be paid off over a 20 years, making the payment very high.
However, if you have substantial assets and understand the risk, the interest only loan may be perfect for you. Usually, interest only is best for borrowers that receive a substantial amount of their pay in lump sum payments such as a bonus, commission or distribution. Please contact United Home Loans with any questions pertaining to jumbo mortgage loans in Illinois, Indiana, Michigan, Minnesota or Wisconsin. Call us at (708) 531-8388.