5 1 ARM Interest Only Mortgage Favors Your Cash Flow

2007-03-08 10:33:40

( Financial )



When you are arranging for a mortgage, one option your lender may offer you is a 5 1 ARM interest only loan. You may want to consider this 5 1 ARM interest only mortgage under certain circumstances.

A 5 1 ARM interest only mortgage is usually granted for thirty years with a fixed interest rate for the first 5 years; for the remaining 25 years on the loan, you will be subject to a 1 year adjustable rate mortgage. The annual adjustment on interest rate is usually indexed to Treasury note yields (unless your lender uses another index rate). In addition, during the first 5 years, your payments will go towards interest alone because of the interest only mortgage feature. You start amortizing principal only after this period.

You may find a 5 1 ARM interest only loan favorable if you anticipate coming into substantial funds in the next few years. These funds may come from an inheritance, any stock options you may be entitled to or sale of an asset. By choosing a package that guarantees interest rate for a short term, you introduce an element of flexibility in your finances that reflects the time frame when you expect to get your extra funds.

A 5 1 ARM interest only loan is equally beneficial if you plan to stay in your home for a short period. Then, you don't have to pay higher rates for long-term financing. Try getting minimal closing costs to have the chance of recouping them over the shorter period.

If you work out the numbers with your lender or financial advisor, you will find that the 5 1 ARM interest only mortgage will boost your cash flow during the period. Normally, this package subjects you to a lower initial rate than the ordinary 30-year fixed rate. This lower interest only mortgage rate coupled with the interest only payment results in a lower cash outflow.


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