Yale Roth M.A., M.Ed

This mortgage question I got this morning and I thought I would blog the answer as many homeowners and first time home buyers may be interested.

Is there such a mortgage product as a 30 year fixed interest only mortgage?

The answer is “no.”

Interest only mortgages are only used with adjustable rate mortgages also known as ARMs. 

There used to be a mortgage product called a 10/20 interest only which meant the mortgage rate was fixed for 30 years however the interest only option was only applicable for the first 10 years.

So there is the 3 year, 5 year, 7 year and 10 year adjustable rate mortgage.  Now if the homeowner or first time home buyer qualifies, they can add an interest only feature to the mortgage.

That means that the mortgage interest rate is fixed for the fixed period – either 3, 5, 7 or 10 years, then the mortgage rate will adjust.

The homeowner or first time home buyer has the option of making interest only payments for the first 10 years.

After 10 years the mortgage will begin to amortize over a 20 year period.

In theory, the mortgage must be satisfied by the 30 year year term.

For example, let’s say the homeowner or first time home buyer takes out a 5 year interest only mortgage.

The mortgage rate will be fixed for 5 years, after which time it can change.  Even if it does change, the homeowner or first time home buyer can make interest only payments up to the 10th year of the mortgage.

So, let’s say the original mortgage amount was $200,000 and the homeowner or first time home buyer just made interest only payment for the first 10 years.

After that point, the mortgage would begin to amortize over a 20 year term at the $200,000 balance so the mortgage would be paid off in 30 years.

All interest only mortgages have 30 year terms; however, the interest only feature only applies for the first 10 years of the mortgage.

In conclusion, there is no mortgage product called the 30 year fixed interest only.  There are adjustable rate mortgages with interest only features that allow the homeowner or first time home buyer to make interest only payments for the first 10 years, after which time the mortgage will amortize over the remaining 20 years so that it’s paid in full after 30 years.

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