Interest only loans have several advantages over amortizing loans. Interest only loans require only the payment of interest each month, which reduces the typical mortgage payment about 25%. Thus, a buyer can afford more house for the same payment, increasing their buying power. The other advantage of the interest only loan is something called “recasting”. With a traditional loan, any additional payment of principal would shorten the length of the loan but not affect the monthly payment. With an interest only, any principal payment would result in a lower monthly payment since interest is calculated on the remaining mortgage balance.
Because of relatively low interest rates, today’s home buyers are financing a greater percentage of the purchase price than ever before.
When buyers finance more than 80% of the purchase price, they must either pay mortgage insurance or get a second mortgage for the amount above 80%.
As interest rates continue to rise, mortgage insurance has become a more attractive option than getting a 2nd mortgage. This is especially true with a new program called Single Premium Insurance, where the buyer can factor the insurance premium into the loan amount, making the total payment less than if the buyer would have gotten two mortgages. Be sure your buyers look into this new options when financing their home purchase
