Interest Only Jumbo Mortgages

2007-07-24 08:31:47

( Financial )



What are Interest Only Jumbo Loans?

You may be familiar with the conventional type of jumbo mortgage wherein you pay both interest and principal within a specified number of years. Your loan amortization is made up mostly of interest, then a small portion of the principal.

An interest jumbo type of mortgage has the same period as conventional loans, usually fifteen, twenty or thirty years. However, you pay only the interest amount during the first five or seven years, then the remainder of the principal is amortized over the remaining period. Therefore your amortization amount during the interest only period is much less.

The interest only jumbo mortgage was conceptualized based on the premise that the average American home is usually sold within five or seven years. Hence, the principal part of the amortization would not have much impact on your loan balance anyway, and will only affect you if you choose not to repay the loan principal after the interest free period.

Advantages of Interest Only Jumbo Mortgages

Jumbo loans are at least six hundred fifty thousand dollars or more, so having to pay both the interest and principal monthly would cost you a lot of outlay. By paying only the interest, you save cash which you can use for other purposes such as funding another asset, your child's education, or other investments.

If you do plan to sell your home at the point when the interest only period expires, you will be able to pay back the loan in full and will have earned extra income if your property value has risen by that time.

Risks of Interest Only Jumbo Loans

This type loan can pose risks for you if you are unable to sell your home within the interest only period, or if you have changed your mind about selling. You will either have to pay a larger amortization amount, or refinance your loan.

Home values and prices are also subject to economic conditions, and you could face huge amounts of losses if you were to sell your home during a period of depressed real estate prices.

Before embarking on a decision to acquire an interest only jumbo loan, discuss the advantages and risks very carefully with a financial adviser or lender.


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