what is 5/1 arm interest only loan?

Question

i was qualified for a 5/1 interest only arm loan at 6%. does this mean that the loan on the house won't go down at all and will there be any kind of fees at the end of the 5 years.. if anyone can explain all the details it would greatly be appreciated.

Answer 1

I have to ask why your mortgage broker or lender didn't really explain this to you in great detail. I am a mortgage broker that sells these loans all the time.

I educate my clients about the ups and downs of these loans. ARM products are good as long as you understand the risks and benefits. Usually the benefits out weighs the risk.

So you were approved for a 5/1 ARM Interest Only product. The 6% rate is good for the entire 5 years. The only portion of the loan you will be paying is the interest portion and nothing will go to the principle part of the loan. In laymans terms there will be nothing going towards the equity of your home. All ARM products are based on a 30 year amortization schedule. What you need to do is find out what index this ARM product is tied to. Is it tied to the LIBOR index or the Treasury index? All ARM products have a cap. Lets say the cap is 5%. This means that the rate can not go over the existing rate of no more than 5% during the lifetime of the loan. Your rate when it comes due at the beginning of the 6th year it can adjust 2% up or 2% down depending on the rate adjustment cap. The ARM will adjust every 12 months starting in the 6th year. The way the new rate is calculated is lets say the index is at 5.062 and the margin is at 3.520. You will add these figures together then add 2% to the rate. The new interest rate will be 10.582%.

Having an interst only rate is great because not only does it allow you to save money but you can send in more money and have it applied to the principle without any penalty as long as you don't go over 20% in a given year for the 5 years.

Answer 2

If you do not understand how your loan works, then DO NOT SIGN ANYTHING.

These are great questions and you should address your potential lender. AND as any prudent person would do, also ask these same qquestions of the other potential lenders you are talking with.

Quickly, though...

5/1 interest only ARM means that the 6% rate will stay that way for 5 years. After the 5th year, the rate will be tied to some external rate and adjusted as it changes (please find out how much % OVER the tied rate you'll be paying and what your annual increase limit and life-time increase limit is).

This has nothing to do with your loan balance (in fact that may go up if this is a negatively amortizing loan -> one where the 6% payments are less than the actual interest charge).

Please, please go talk to someone who knows about mortgages and is not trying to sell you something. Try your real estate agent or your local banker.

Answer 3

5 1 Arm Interest Only

Answer 4

The terms of loans can be very individual, but in general what happens at the end of five years is that your interest rate would become variable based on whatever index and margin was specified in the loan agreement. The principal of the loan would then be amortized over the remainder of the term of the loan (presumably 25 more years). Your monthly payments would go up significantly because your interest rate would likely be higher than the 6% you pay for the first five years PLUS you now have, effectively, a 25 year variable rate loan.

Answer 5

lets say you take out a loan for $100,000; a 5 year interest only arm at 6% (Using a 30 year amortization schedule...which you have to find out 20, 25, or 30 year amortization schedule) only requires a minimal payment of the interest portion of your monthly mortgage.. it is for people that want to buy and sell in less than 5 years, or need that amount for a short period of time. After 5 years.. you owe the rest of the amount of the loan...basically $100,000...you're paying around $6,000/year (for $100,000) every year for 5 years, then the $100,000 (approx is due) there are also taxes and closing costs you have to consider...hope this helps

Answer 6

Your rate is fixed for 60 months, and then will adjust every 12 months. What it adjusts to depends on your margin and caps. There won't be any fees, just a different payment. Is the index based on LIBOR?

more info on interest only arms, http://www.choicefinance.net/interest-only-loans.htm

Answer 7

Not at expert, but and arm interest only loan is a BAD IDEA, you pay little at first but then you end up paying huge amounts of money.
Google Suzie Orman or Dave Ramsey and you can find financial advice.
Look for a fixed rate mortgage, you know what you pay.

Answer 8

I would like to say thank you to Destiny kings Loan finance for all the things they have helped me with. I have a large family, and every time we have had a crisis Destiny kings Loan finance has helped us out. I thank God for the help they have provided to me and my family,email them today at {[e-mail]

{[e-mail]}

Answer 9

More details needed

Answer 10

that's a tricky question...