Interest-Only Mortgages

If you’re searching for an affordable way to purchase a home, you may want to look into an interest-only mortgage. An interest-only mortgage allows homeowners to avoid paying down their principal balance for the first few years of homeownership. Instead of making payments toward the principal balance, new homeowners only have to make interest payments.

Read on to find out more about how interest-only mortgages work, who can qualify for them, and how to apply with Griffin Funding.

What Is an Interest-Only Home Loan?

Borrowers who take out a traditional mortgage are required to begin making payments toward the principal balance of the loan plus interest from the moment their first mortgage payment is due. However, with an interest-only mortgage, borrowers only pay the interest on their home loan for a period that generally ranges from five to ten years. After this initial period has expired, payments are recalculated and borrowers begin paying down the principal amount.

At Griffin Funding, interest-only loans are part of our non-QM mortgage programs. These types of loans have more flexible qualification requirements when compared to traditional mortgages.

How Do Interest-Only Home Loans Work?

When you take out an interest-only mortgage, you will only have to pay interest on the loan for a predetermined amount of time. Generally, this interest-only period lasts for about five to ten years, depending on the terms set by your lender. During this initial term, you’re welcome to make payments towards the principal loan amount, but this isn’t required. If you can afford it, you might want to consider paying the principal on interest-only loan early because it can help reduce your debt.

After the interest-only period ends, you will begin paying down the principal balance until the remainder of the loan is paid. Keep in mind that your mortgage payments will increase once you’re past the interest-only portion of the loan terms, so you’ll need to plan accordingly. You do have the option to pay off the remaining balance in a lump sum or refinance your loan if you so wish.

Interest-only loans are typically structured as adjustable-rate mortgages (ARMs). This means the interest rate on your mortgage will be locked in for a certain timeframe—but, after that introductory period expires, your interest rate will change according to market conditions. While ARMs tend to offer a low introductory rate, be aware that your interest rate can fluctuate later in the life of your mortgage. In addition to ARM loans, Griffin Funding also offers interest only fixed rate mortgages either on a 40yr fixed term or a 30yr fixed term. For example:

  • 30yr fixed rate with the first 10yrs being interest only, after 10yrs the loan reamortize to a 20yr fixed term at the same rate
  • 40yr fixed rate with the first 10yrs being interest only, after 10yrs the loan reamortize to a 30yr fixed term at the same rate 

Calculating Interest-Only Home Loans

An interest-only mortgage starts out with a fixed interest rate. You’ll be locked into this interest rate through the interest-only term of the loan. Then, you will begin paying down the principal amount of the loan in addition to interest. And, since interest-only loans are typically structured as adjustable-rate mortgages, your interest rate will likely change based on the index and margin, which are determined by market conditions and the lender respectively.

How Do I Qualify for an Interest-Only Mortgage?

In general, more people are able to qualify for our non-QM loan program compared to qualified mortgages (QMs). That’s because QMs have stricter qualification criteria and more stringent income verification standards. Non-QM loans, on the other hand, don’t rely on traditional income verification methods. This can make interest-only loans attractive prospects for real estate investors and other individuals whose income isn’t accurately reflected on tax returns, W-2s, and other income documents.

If you’re unsure whether or not you qualify for an interest-only mortgage, speak with one of our loan specialists today. Our team can advise you on whether an interest-only loan is the right fit for your situation. You can also submit an online application to find out if you qualify.

Interest-Only Mortgage Highlights

Interest-only mortgages provide borrowers with a number of important benefits. For those who want to defer payments toward the principal balance of their loan or don’t qualify for a traditional mortgage, interest-only mortgages can be an appealing prospect. Below, we’ve listed some of the main benefits of interest-only home loans:

  • No need to rely on traditional income verification methods 
  • Convenient for residential real estate investors 
  • Lowered payments for the interest-only term of the loan
  • An extended timeframe where new homeowners can save money and build wealth 

An interest-only mortgage can be beneficial if your annual income is unpredictable. Also, new homeowners can use the money they save in the first few years of their interest-only mortgage to make investments and pay off existing debts.

Are There Any Risks with Interest-Only Loans?

Although interest-only loans allow borrowers to make low mortgage payments for a few years, you should consider the risks of these types of loans before applying. Some of the most important factors to consider when taking out an interest-free loan include: 

  • Increased future payments: In an interest-only loan, the interest-only period only lasts for so long. After this period is over, your payments will increase substantially. That’s because you will have to begin paying down the principal amount on top of interest payments. Thus, it’s important to have a plan for how you’ll handle increased payments in the future. 
  • No gain in home equity: If you only pay interest and don’t make any payments toward the principal balance, you won’t gain equity in your home other than through potential appreciation. This means you won’t really be working towards owning your home. However, keep in mind that if you enter into an interest-only mortgage, you can still make optional payments toward the principal balance and gain home equity if you choose. 
  • Potential loss of home value: Homes can gain or lose value over time, depending on market conditions. But it’s possible that the value of your home depreciates after taking out an interest-only loan. This can make it hard to sell or refinance your home, and leave you stuck with large mortgage payments once the interest-only term expires. 

Additionally, with Griffin Funding, you’ll have access to competitive interest-only mortgage rates.

Is an Interest-Only Right for You?

If you’re considering applying for an interest-only loan, it’s important to evaluate your financial situation and come up with a long-term plan. Interest-only loans have unique demands, such as a substantial increase in future mortgage payments, so it’s essential that you’re prepared to meet those demands.

When you work with Griffin Funding, our loan specialists can help you review the pros and cons of an interest-only loan and determine if it’s the right option for you. If it seems like a good fit, we can get you started on the loan application process and guide you through it. However, if an interest-only mortgage doesn’t seem like a good fit, we can review other lending options that may be better suited to your needs.

Ready to apply for a loan? Contact us today.


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Non-QM Loan Programs Offered by Griffin Funding

Here are some of the non-QM mortgages and loan programs offered here at Griffin Funding: 

  • Bank statement loans: Loans where bank statements can be used as the sole source of income verification. 
  • Debt-Service-Coverage Ratio loans: Loans where the rental income of an investment property can be used as the sole source of income verification.  
  • Asset-based loans: Loans that aren’t based on income, but rather use liquid assets as income. 
  • Foreign national loans: Loans that cater to noncitizens who hope to purchase a home in the U.S. 
  • Recent credit event loans: Loan available for those who have poor credit or whose FICO score was recently impacted by a credit event.

Apply for an Interest-Only Loan Now

An interest-only loan can be beneficial for certain individuals who are interested in purchasing a home. If you’re considering an interest-only loan, contact Griffin Funding today. Our loan specialists are happy to advise you and help you navigate the lending process. Simply call us at (855 394-8288 to speak with a loan specialist or complete an application online at your own convenience.