Lower your payment with an Interest-only ARM loan Another variation of the ARM is the Interest-only adjustable rate mortgage. This loan makes it affordable for borrowers to qualify for a loan by giving them the option to pay only the interest (not the principal) for the first 3-10 years of the loan. Monthly payments are usually more affordable. Afterwards, the mortgage rate adjusts to a traditional ARM at the current indexed interest rate with new principal and interest payments calculated for the remaining term of the loan.
Example A 30-year ARM loan of $250,000 at 7.50% APR has interest-only payments for 5 years. The payment during this time would be $1,522 per month. After 5 years, the payment would increase to $1,816 per month.
Sub-prime loans Borrowers who have a low FICO® score will usually fall into the sub-prime mortgage category. As a result, they’ll qualify for a loan but at a much higher rate. Lenders may apply stiffer pre-payment penalty fees in the form of interest payments to dissuade borrowers from building up any equity in their home. Some lenders may require a “balloon” payment to pay off the remaining balance of the loan after a fixed period of time.
