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CHAPTER 4 Specialty Loans, Government Programs, and Refinance Loans

Mortgage loans can be used for purposes other than buying a property. The following list comprises different types of mortgage loans: interest only, equity, no money down, government bond programs, and portfolio.

INTEREST ONLY

We touched on an interest-only loan feature when discussing payment-option ARMs. Sometimes an “interest-only” feature is added to a standard conventional fixed-rate mortgage.

It's easy enough to explain: You pay only the interest on the mortgage, not the principal. If you examine the first monthly payment on a 30-year fully amortized, fixed-rate mortgage on $250,000 at 6.50 percent, the payment would break down like this:

Now look 10 years down the road. You'll see that the principal is paid down; more of the monthly payment is now going toward principal, and less to interest.

A fully amortizing loan will have the loan paid off in exactly 30 years, but the interest-only feature allows that the borrower make only an interest payment. Most interest-only loans have the interest-only feature available for the first 10 years before turning into a 20-year fixed fully amortized loan.

Now look at the interest-only feature and again look 10 years down the road and the principal balance is $250,000.00.

The new monthly payment for a 20-year loan at 6.50 percent and $250,000 is $1,863.93 per month.

An interest-only feature can be added to a fixed-rate mortgage. The feature is designed to give monthly payment options to the buyers who may get paid a commission or earn large bonuses periodically. For those who opt for such a program, if s important not to get too comfortable with the interest-only fea

Principal and Interest Payment

$1,580.01

Amount to Principal

$ 226.00

Amount to Interest

$1,354.17

Principal Balance

$211,940.32

Principal and Interest Payment

$ 1,580.01

Amount to Principal

$ 429.83

Amount to Principal

$ 1,150.34

ture. You do need to pay down the mortgage when you can (and these loans have no prepayment penalties).

Adding an interest-only feature typically increases the mortgage rate by 1/4 percent compared to the same 30-year fixed rate mortgage without an interest-only feature.

 
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