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Gaining interest in the interest

Daily file photoFixed-rate/Interest-only 30-year mortgage loans have helped spur the real estate industry. Borrowers make only interest payments for the first 10 years. In the 11th year the loan payments are recalculated to include interest and principal over the next 20 years. On a $500,000 loan thats a jump of $1,000 a month in your payment.
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AVON Youre a 30-something couple with a couple kids headed toward high school then college and the minivan needs an overhaul but you still want to buy a house.The folks from the mortgage industry, whove become extremely creative in finding ways to accommodate you, might have hit a home run with the hottest thing in the loan world.The 30-year fixed-rate/interest-only mortgage.For the right circumstances and the right borrower, its a great loan program and I sell many of them, said local mortgage broker William DesPortes of DesPortes, Selig & Associates in Avon.

Basically, it works like this.For the first 10 years of your 30-year loan, you make only interest payments. Over the next 20 years you pay off the remaining interest and all the principal.So obviously, the payments are lower for that first decade.The upside is that youre locking into a 30-year fixed rate, which is attractive to many borrowers, DesPortes said.But the loan package is fraught with possible pitfalls for the unprepared.The interest-only teaser is a 10-year period of reduced monthly payments. That allows people to get into a home at reduced monthly payments because theyre paying only the interest.At the 121st payment, the beginning of year 11, you have 20 years to pay off everything. That means youre looking at significantly higher payments a decade down the road.You either need to make arrangements for principal reduction payments over the first 10 years or make sure your income will cover it when those increased payments shows up, DesPortes said.

You can reduce the jolt to your finances if you pay down the principal during those first 10 years, DesPortes said. That will also reduce your monthly interest payment the first 10 years.Youre only paying interest on the principal balance, so it recalculates when you pay down the principal, DesPortes said. If youve taken the necessary steps to pay that balance down, it should help with that transition in year 11.The package is good for people who work on commissions and have bonuses as part of their compensation packages.If youre going to be in your home for 30 years, but you need the breathing room over the first 10 years because of kids, tuition and other payments, this might be the package for you, DesPortes said. It takes an educated borrower and someone who will be prepared to handle the increased payments when they show up.On a $500,000 loan, the payment on a traditional 30-year fixed mortgage will run about $3,078.59.On a 30-year interest-only loan the monthly payment is $2,604.17 for the first 10 years.But in the 11th year, the 121st payment, be ready to write a check for $3,654.64 a month.Thats a $1,000 hit coming at you in about a decade, DesPortes said. I tell my clients that if they know thats coming and can be prepared, then lets go ahead with it.Quicken Loans Inc. says demand has skyrocketed for its fixed-rate interest-only mortgage, Quickens Bob Walters told the Wall Street Journal. Credit Suisse Group told the Wall Street Journal that it expects demand for these loans to continue to grow.But all that glitters is not gold, cautioned DesPortes. Borrowers who make interest-only payments dont build up equity in their homes, apart from increases in property values.Vail, Colorado


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