Reverse Mortgage FAQ's

1. What is an interest-only mortgage?

An interest-only mortgage is a loan where the borrower pays only interest for a set period. During this time, the loan balance does not decrease, resulting in lower initial monthly payments.

2. How does an interest-only mortgage work?

The loan begins with an interest-only period, followed by a repayment phase where principal and interest are paid. Monthly payments increase once principal repayment begins, based on remaining loan balance and term.

3. What is the interest-only period on a mortgage loan?

The interest-only period is the initial phase, often lasting five to ten years, during which payments cover only interest. Principal repayment is deferred until this period ends.

4. Is an interest-only mortgage the same as an adjustable-rate mortgage?

No, they are different features. Interest-only refers to payment structure, while adjustable-rate describes how interest changes. Some loans combine both, but they are not inherently the same.

5. Who should consider an interest-only mortgage?

This loan may suit borrowers with variable income, strong assets, or short-term ownership plans. It is often considered by high earners who prioritize cash flow flexibility early on.

6. How are monthly payments calculated on an interest-only mortgage?

Monthly payments are calculated by applying the interest rate to the outstanding loan balance. Since principal is not reduced, payments remain lower during the interest-only period.

7. Do interest-only mortgage payments increase after the interest-only period ends?

Yes, payments increase when the loan transitions to principal and interest repayment. The remaining balance is amortized over the remaining term, resulting in higher monthly obligations.

8. Are interest-only mortgage rates higher than fixed-rate mortgages?

Interest-only rates are often higher due to increased lender risk. In markets like Washington, pricing may vary based on loan size, borrower profile, and overall market conditions.

9. Can interest-only mortgages have fixed interest rates?

Yes, some interest-only mortgages offer fixed interest rates during the interest-only period. Afterward, the loan may convert to a fixed or adjustable repayment structure.

10. What happens when the interest-only period ends?

Once the interest-only period ends, the loan converts to a fully amortizing payment schedule. Borrowers must begin paying both principal and interest, increasing monthly payment amounts.

11. What credit score is required for an interest-only mortgage?

Lenders typically require strong credit, often 700 or higher. Exact requirements vary by lender, loan size, and whether the mortgage is structured as a jumbo loan.

12. Do interest-only mortgages require higher income or assets?

Yes, lenders usually require higher income, significant assets, or cash reserves. This ensures borrowers can handle increased payments once principal repayment begins.

13. Are down payment requirements higher for interest-only loans?

Down payment requirements are often higher than standard loans, commonly ranging from 10 percent to 20 percent, depending on credit strength and property type.

14. Are interest-only mortgages available for jumbo loan amounts?

Yes, interest-only options are commonly available for jumbo mortgages. These loans are frequently used to finance higher-priced properties with customized repayment strategies.

15. Can self-employed borrowers qualify for an interest-only mortgage?

Self-employed borrowers may qualify with strong documentation, consistent income history, and substantial reserves. In Washington, lenders often apply additional scrutiny to income verification.

16. What are the risks of an interest-only mortgage?

Risks include payment shock after the interest-only period, lack of equity growth, and higher total interest costs. These loans require careful financial planning and exit strategies.

17. Is an interest-only mortgage a good option in a high interest rate market?

It can be beneficial for short-term strategies or anticipated refinancing. However, higher rates increase long-term costs, so borrowers must weigh cash flow benefits carefully.

18. Can I refinance an interest-only mortgage later?

Yes, borrowers can refinance into a fixed-rate or amortizing loan if credit, income, and market conditions allow. Refinancing may help stabilize payments before increases occur.

19. Are interest-only mortgages allowed for investment properties or second homes?

Yes, many lenders allow interest-only loans for investment properties and second homes. Requirements are stricter, particularly in competitive markets like Washington.

20. How do interest-only mortgages compare to traditional amortizing loans long term?

Long term, interest-only mortgages cost more due to delayed principal repayment. Traditional amortizing loans build equity steadily and provide greater payment predictability, which many borrowers prefer in Washington.

Interest-only Mortgage FAQ's

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