This loan is handy because it offers you predictable monthly bills for the initial portion of your loan, but allows you to take advantage of interest rate fluctuations in the latter half of your term.
What can I use a 7 Year Interest Only Loan for, and what are my options
With the 7 Year Interest Only Loan, you pay fixed rates for the first seven years of your mortgage. During this period, you will only make payments on the interest portion of your mortgage. For the second period of your mortgage, you will pay on both your interest and principal. You usually pay this portion of your mortgage on an adjustable rate. Your broker will help you determine which index you want to use, but LIBOR is a popular choice.
How can my FICO/ Credit Score affect my mortgage rate
Your credit score is always important when determining your mortgage rate. Below is a general profile of good credit.
You have established a credit history with auto loans, mortgages, and/or credit cards.
None of your payments were more than thirty days late.
You have not missed a single payment in the last twelve months, but may have missed a few over the past seven years.
Q: What is a disadvantage of the 7 Year Interest Only Loan?
A: One disadvantage is that you will not start to build equity until you begin making payments on your principal, which in most cases is seven years with this loan. Many lenders let their borrowers make voluntary payments on their principal in conjunction with their interest payments during their interest only period. This helps you build equity. It also lowers your interest payments because the lenders adjust your mortgage payments to reflect your new principal balance. If you have a large income tax return, or get a bonus at work, it would be wise to invest it on your principal.
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