20 Year Fixed Interest-Only Mortgage
In this example, we'll look at a 20 year fixed-rate mortgage where you may make interest-only payments during the first 10 years. After that the mortgage is fully amortized. Thus, the payment will increase at the beginning of the 11th year even though the interest rate will remain unchanged over the life of the loan. Since it is a fixed-rate mortgage the minimum, maximum and starting interest rate will be the same and the index rate, margin and adjustments are ignored.
After reviewing this example, use the interest-only mortgage calculator to help you decide if an interest-only mortgage meets your needs.
After 10 years that the principal balance remains at the original loan amount and more than $10,000 per year has been paid in interest. At the beginning of year 11 the loan is fully amortized and the minimum monthly payment jumps $950 to $1,817, an increase of 110%! Note that the payment shock when entering the fully amortizing period is much greater for shorter term loans than longer ones.
| Stable | ▲ | |||||
|---|---|---|---|---|---|---|
| Month | Interest Rate |
Index Rate |
Payment | Interest | Principal | Balance |
| 1 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 2 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 3 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 4 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 5 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 6 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 7 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 8 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 9 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 10 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 11 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 12 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 1 | $10,400 | $10,400 | $0 | |||
| 13 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 14 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 15 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 16 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 17 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 18 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 19 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 20 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 21 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 22 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 23 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 24 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 2 | $10,400 | $10,400 | $0 | |||
| 25 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 26 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 27 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 28 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 29 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 30 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 31 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 32 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 33 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 34 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 35 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 36 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 3 | $10,400 | $10,400 | $0 | |||
| 37 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 38 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 39 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 40 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 41 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 42 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 43 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 44 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 45 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 46 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 47 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 48 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 4 | $10,400 | $10,400 | $0 | |||
| 49 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 50 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 51 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 52 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 53 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 54 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 55 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 56 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 57 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 58 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 59 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 60 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 5 | $10,400 | $10,400 | $0 | |||
| 61 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 62 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 63 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 64 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 65 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 66 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 67 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 68 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 69 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 70 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 71 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 72 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 6 | $10,400 | $10,400 | $0 | |||
| 73 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 74 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 75 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 76 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 77 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 78 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 79 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 80 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 81 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 82 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 83 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 84 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 7 | $10,400 | $10,400 | $0 | |||
| 85 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 86 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 87 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 88 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 89 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 90 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 91 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 92 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 93 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 94 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 95 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 96 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 8 | $10,400 | $10,400 | $0 | |||
| 97 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 98 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 99 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 100 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 101 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 102 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 103 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 104 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 105 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 106 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 107 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 108 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 9 | $10,400 | $10,400 | $0 | |||
| 109 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 110 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 111 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 112 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 113 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 114 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 115 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 116 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 117 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 118 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 119 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| 120 | 6.500% | 0.000% | $867 | $867 | $0 | $160,000 |
| Year 10 | $10,400 | $10,400 | $0 | |||
| 121 | 6.500% | 0.000% | $1,817 | $867 | $950 | $159,050 |
| 122 | 6.500% | 0.000% | $1,817 | $862 | $955 | $158,095 |
| 123 | 6.500% | 0.000% | $1,817 | $856 | $960 | $157,134 |
| 124 | 6.500% | 0.000% | $1,817 | $851 | $966 | $156,169 |
| 125 | 6.500% | 0.000% | $1,817 | $846 | $971 | $155,198 |
| 126 | 6.500% | 0.000% | $1,817 | $841 | $976 | $154,222 |
| 127 | 6.500% | 0.000% | $1,817 | $835 | $981 | $153,240 |
| 128 | 6.500% | 0.000% | $1,817 | $830 | $987 | $152,254 |
| 129 | 6.500% | 0.000% | $1,817 | $825 | $992 | $151,261 |
| 130 | 6.500% | 0.000% | $1,817 | $819 | $997 | $150,264 |
| 131 | 6.500% | 0.000% | $1,817 | $814 | $1,003 | $149,261 |
| 132 | 6.500% | 0.000% | $1,817 | $808 | $1,008 | $148,253 |
| Year 11 | $21,801 | $10,054 | $11,747 | |||
| 133 | 6.500% | 0.000% | $1,817 | $803 | $1,014 | $147,239 |
| 134 | 6.500% | 0.000% | $1,817 | $798 | $1,019 | $146,220 |
| 135 | 6.500% | 0.000% | $1,817 | $792 | $1,025 | $145,195 |
| 136 | 6.500% | 0.000% | $1,817 | $786 | $1,030 | $144,165 |
| 137 | 6.500% | 0.000% | $1,817 | $781 | $1,036 | $143,129 |
| 138 | 6.500% | 0.000% | $1,817 | $775 | $1,041 | $142,088 |
| 139 | 6.500% | 0.000% | $1,817 | $770 | $1,047 | $141,040 |
| 140 | 6.500% | 0.000% | $1,817 | $764 | $1,053 | $139,988 |
| 141 | 6.500% | 0.000% | $1,817 | $758 | $1,058 | $138,929 |
| 142 | 6.500% | 0.000% | $1,817 | $753 | $1,064 | $137,865 |
| 143 | 6.500% | 0.000% | $1,817 | $747 | $1,070 | $136,795 |
| 144 | 6.500% | 0.000% | $1,817 | $741 | $1,076 | $135,719 |
| Year 12 | $21,801 | $9,267 | $12,534 | |||
| 145 | 6.500% | 0.000% | $1,817 | $735 | $1,082 | $134,637 |
| 146 | 6.500% | 0.000% | $1,817 | $729 | $1,087 | $133,550 |
| 147 | 6.500% | 0.000% | $1,817 | $723 | $1,093 | $132,457 |
| 148 | 6.500% | 0.000% | $1,817 | $717 | $1,099 | $131,357 |
| 149 | 6.500% | 0.000% | $1,817 | $712 | $1,105 | $130,252 |
| 150 | 6.500% | 0.000% | $1,817 | $706 | $1,111 | $129,141 |
| 151 | 6.500% | 0.000% | $1,817 | $700 | $1,117 | $128,024 |
| 152 | 6.500% | 0.000% | $1,817 | $693 | $1,123 | $126,900 |
| 153 | 6.500% | 0.000% | $1,817 | $687 | $1,129 | $125,771 |
| 154 | 6.500% | 0.000% | $1,817 | $681 | $1,136 | $124,635 |
| 155 | 6.500% | 0.000% | $1,817 | $675 | $1,142 | $123,494 |
| 156 | 6.500% | 0.000% | $1,817 | $669 | $1,148 | $122,346 |
| Year 13 | $21,801 | $8,428 | $13,373 | |||
| 157 | 6.500% | 0.000% | $1,817 | $663 | $1,154 | $121,192 |
| 158 | 6.500% | 0.000% | $1,817 | $656 | $1,160 | $120,031 |
| 159 | 6.500% | 0.000% | $1,817 | $650 | $1,167 | $118,865 |
| 160 | 6.500% | 0.000% | $1,817 | $644 | $1,173 | $117,692 |
| 161 | 6.500% | 0.000% | $1,817 | $638 | $1,179 | $116,513 |
| 162 | 6.500% | 0.000% | $1,817 | $631 | $1,186 | $115,327 |
| 163 | 6.500% | 0.000% | $1,817 | $625 | $1,192 | $114,135 |
| 164 | 6.500% | 0.000% | $1,817 | $618 | $1,199 | $112,936 |
| 165 | 6.500% | 0.000% | $1,817 | $612 | $1,205 | $111,731 |
| 166 | 6.500% | 0.000% | $1,817 | $605 | $1,212 | $110,520 |
| 167 | 6.500% | 0.000% | $1,817 | $599 | $1,218 | $109,302 |
| 168 | 6.500% | 0.000% | $1,817 | $592 | $1,225 | $108,077 |
| Year 14 | $21,801 | $7,532 | $14,269 | |||
| 169 | 6.500% | 0.000% | $1,817 | $585 | $1,231 | $106,846 |
| 170 | 6.500% | 0.000% | $1,817 | $579 | $1,238 | $105,608 |
| 171 | 6.500% | 0.000% | $1,817 | $572 | $1,245 | $104,363 |
| 172 | 6.500% | 0.000% | $1,817 | $565 | $1,251 | $103,111 |
| 173 | 6.500% | 0.000% | $1,817 | $559 | $1,258 | $101,853 |
| 174 | 6.500% | 0.000% | $1,817 | $552 | $1,265 | $100,588 |
| 175 | 6.500% | 0.000% | $1,817 | $545 | $1,272 | $99,316 |
| 176 | 6.500% | 0.000% | $1,817 | $538 | $1,279 | $98,037 |
| 177 | 6.500% | 0.000% | $1,817 | $531 | $1,286 | $96,752 |
| 178 | 6.500% | 0.000% | $1,817 | $524 | $1,293 | $95,459 |
| 179 | 6.500% | 0.000% | $1,817 | $517 | $1,300 | $94,159 |
| 180 | 6.500% | 0.000% | $1,817 | $510 | $1,307 | $92,852 |
| Year 15 | $21,801 | $6,577 | $15,224 | |||
| 181 | 6.500% | 0.000% | $1,817 | $503 | $1,314 | $91,539 |
| 182 | 6.500% | 0.000% | $1,817 | $496 | $1,321 | $90,218 |
| 183 | 6.500% | 0.000% | $1,817 | $489 | $1,328 | $88,890 |
| 184 | 6.500% | 0.000% | $1,817 | $481 | $1,335 | $87,554 |
| 185 | 6.500% | 0.000% | $1,817 | $474 | $1,343 | $86,212 |
| 186 | 6.500% | 0.000% | $1,817 | $467 | $1,350 | $84,862 |
| 187 | 6.500% | 0.000% | $1,817 | $460 | $1,357 | $83,505 |
| 188 | 6.500% | 0.000% | $1,817 | $452 | $1,364 | $82,140 |
| 189 | 6.500% | 0.000% | $1,817 | $445 | $1,372 | $80,769 |
| 190 | 6.500% | 0.000% | $1,817 | $438 | $1,379 | $79,389 |
| 191 | 6.500% | 0.000% | $1,817 | $430 | $1,387 | $78,003 |
| 192 | 6.500% | 0.000% | $1,817 | $423 | $1,394 | $76,608 |
| Year 16 | $21,801 | $5,557 | $16,244 | |||
| 193 | 6.500% | 0.000% | $1,817 | $415 | $1,402 | $75,207 |
| 194 | 6.500% | 0.000% | $1,817 | $407 | $1,409 | $73,797 |
| 195 | 6.500% | 0.000% | $1,817 | $400 | $1,417 | $72,380 |
| 196 | 6.500% | 0.000% | $1,817 | $392 | $1,425 | $70,955 |
| 197 | 6.500% | 0.000% | $1,817 | $384 | $1,432 | $69,523 |
| 198 | 6.500% | 0.000% | $1,817 | $377 | $1,440 | $68,083 |
| 199 | 6.500% | 0.000% | $1,817 | $369 | $1,448 | $66,635 |
| 200 | 6.500% | 0.000% | $1,817 | $361 | $1,456 | $65,179 |
| 201 | 6.500% | 0.000% | $1,817 | $353 | $1,464 | $63,715 |
| 202 | 6.500% | 0.000% | $1,817 | $345 | $1,472 | $62,244 |
| 203 | 6.500% | 0.000% | $1,817 | $337 | $1,480 | $60,764 |
| 204 | 6.500% | 0.000% | $1,817 | $329 | $1,488 | $59,276 |
| Year 17 | $21,801 | $4,469 | $17,332 | |||
| 205 | 6.500% | 0.000% | $1,817 | $321 | $1,496 | $57,781 |
| 206 | 6.500% | 0.000% | $1,817 | $313 | $1,504 | $56,277 |
| 207 | 6.500% | 0.000% | $1,817 | $305 | $1,512 | $54,765 |
| 208 | 6.500% | 0.000% | $1,817 | $297 | $1,520 | $53,245 |
| 209 | 6.500% | 0.000% | $1,817 | $288 | $1,528 | $51,716 |
| 210 | 6.500% | 0.000% | $1,817 | $280 | $1,537 | $50,180 |
| 211 | 6.500% | 0.000% | $1,817 | $272 | $1,545 | $48,635 |
| 212 | 6.500% | 0.000% | $1,817 | $263 | $1,553 | $47,081 |
| 213 | 6.500% | 0.000% | $1,817 | $255 | $1,562 | $45,520 |
| 214 | 6.500% | 0.000% | $1,817 | $247 | $1,570 | $43,950 |
| 215 | 6.500% | 0.000% | $1,817 | $238 | $1,579 | $42,371 |
| 216 | 6.500% | 0.000% | $1,817 | $230 | $1,587 | $40,784 |
| Year 18 | $21,801 | $3,308 | $18,493 | |||
| 217 | 6.500% | 0.000% | $1,817 | $221 | $1,596 | $39,188 |
| 218 | 6.500% | 0.000% | $1,817 | $212 | $1,604 | $37,583 |
| 219 | 6.500% | 0.000% | $1,817 | $204 | $1,613 | $35,970 |
| 220 | 6.500% | 0.000% | $1,817 | $195 | $1,622 | $34,348 |
| 221 | 6.500% | 0.000% | $1,817 | $186 | $1,631 | $32,717 |
| 222 | 6.500% | 0.000% | $1,817 | $177 | $1,640 | $31,078 |
| 223 | 6.500% | 0.000% | $1,817 | $168 | $1,648 | $29,429 |
| 224 | 6.500% | 0.000% | $1,817 | $159 | $1,657 | $27,772 |
| 225 | 6.500% | 0.000% | $1,817 | $150 | $1,666 | $26,106 |
| 226 | 6.500% | 0.000% | $1,817 | $141 | $1,675 | $24,430 |
| 227 | 6.500% | 0.000% | $1,817 | $132 | $1,684 | $22,746 |
| 228 | 6.500% | 0.000% | $1,817 | $123 | $1,694 | $21,052 |
| Year 19 | $21,801 | $2,070 | $19,731 | |||
| 229 | 6.500% | 0.000% | $1,817 | $114 | $1,703 | $19,350 |
| 230 | 6.500% | 0.000% | $1,817 | $105 | $1,712 | $17,638 |
| 231 | 6.500% | 0.000% | $1,817 | $96 | $1,721 | $15,916 |
| 232 | 6.500% | 0.000% | $1,817 | $86 | $1,731 | $14,186 |
| 233 | 6.500% | 0.000% | $1,817 | $77 | $1,740 | $12,446 |
| 234 | 6.500% | 0.000% | $1,817 | $67 | $1,749 | $10,697 |
| 235 | 6.500% | 0.000% | $1,817 | $58 | $1,759 | $8,938 |
| 236 | 6.500% | 0.000% | $1,817 | $48 | $1,768 | $7,169 |
| 237 | 6.500% | 0.000% | $1,817 | $39 | $1,778 | $5,391 |
| 238 | 6.500% | 0.000% | $1,817 | $29 | $1,788 | $3,604 |
| 239 | 6.500% | 0.000% | $1,817 | $20 | $1,797 | $1,807 |
| 240 | 6.500% | 0.000% | $1,816 | $10 | $1,807 | $0 |
| Year 20 | $21,801 | $749 | $21,052 | |||
| Grand Total | $322,012 | $162,012 | $160,000 |
Fixed-Rate Interest-Only Mortgages
Interest-Only ARMs With Interest-Only Periods Matching Fixed-Rate Period
Interest-Only ARMs With Interest-Only Periods Longer Than Fixed-Rate Period
Mortgage Calculator - Help
- Amortization Schedule
- The amortization schedule show you how monthly principal and interest payment and principal balances change over the life of your loan.
- Floor Rate
- Floor rate is the minimum interest rate for an adjustable rate mortgage (ARM).
- Index Rate
- Rate Adjustment on ARMs are based on the index rate, the margin, the adjustment schedule, interest rate caps, and floor rate specified in your loan documents. Index rates change over time. They should be published and widely available. Common indexes used for setting mortgage rates have include the Prime Rate, Libor (London Interbank Offer Rate) and U.S. Treasury Rates.
- Interest
- The portion of your mortgage payment that is due to the interest rate being applied to the principal balance. The Total Interest for a mortgage is the sum of all interest paid over the life of a loan.
- Interest Only
- Interest-only mortgages allow borrowers to make interest-only payments for a specific period of time. Required mortgage payments can be significantly lower during the interest-only period since the borrower is not required to pay down the principal balance during that time. However, the borrower is taking on more risk since the balance is not being paid down. Interest-Only Mortgages come in a wide variety of types, including both fixed and adjustable rate mortgages.
- Interest Rate Adjustments
- The interest rate changes on an adjustable rate mortage (ARM) during adjustment periods specified in your loan documents. Your interest rate may have a fixed period where it does not change followed by adjustements on a regularly scheduled basis. For example, the interest rate on a mortgage could be fixed for 2 years followed by adjustments every 6 months.
- Interest Rate Caps
- Limits how much your interest rate can be increased during each adjustment period for an ARM. The cap for the first adjustment period may be different than the cap on subsequent adjustments. There also may be a maximim overall cap on interest rate increases during the life of your loan.
- Interest Rate Scenarios
- To decide if an adjustable rate mortgage is right for you, you should how changes in interest rates will effect the mortgage. The adjustable rate mortgage calculator shows you how your payment changes in the best case where rates are set at the minimum for your mortgage, the worst case where rates are set at the maximum for your mortgage, and the stable case where rates remain constant for your mortgage.
- Loan Amount
- The initial principal balance or your mortgage at closing.
- Margin
- When an ARM adjusts the margin is added to the index rate to help determine your interest rate. Interest rate caps and the floor rate for your mortgage may limit how much your actual interest rate changes. The margin typically is fixed for the life of the loan. It should be clearly specified in your loan documents.
- Payment Shock
- Occurs when the required minimum payment for a mortgage increases significantly. This can occur on adjustable rate mortgage when interest rates rise sharply, on interest-only mortgages when the interest-only period ends, and on balloon mortgages when the balloon payment is due.
- Principal
- The portion of your mortgage payment that is used to pay down the current balance of your mortgage. The principal balance represents how much you owe on the mortgage.
- Start Rate
- The initial interest rate on an Adjustable Rate Mortgage.
- Term
- The amortization term is one of the key factors that determine your required mortgage payment. Your required mortgage payment for fully amortizing mortgages is the amount that would result in the mortgage being closest to being paid off by the end of the amortization term. Longer amortization terms result in lower required mortgage payments for fully amortizating mortgages, all other things being equal.