10 Year Interest Only Mortgage: For Refinances, Purchases, and Investors
Updated: Dec 31
Exploring the world of mortgages can be complex, especially when considering unique options like the 10-Year Interest-Only Mortgage. At Bennett Capital Partners, we offer this tailored mortgage program to meet your needs. In this blog, we serve as your trusted source, providing comprehensive information about the 10-Year Interest Only Mortgage, including how it works, its benefits and risks, suitable candidates, the qualification process, refinancing options, and more. Let's dive into this topic together, as Bennett Capital Partners guides you every step of the way.
Key Takeaways
✔ 10-Year Interest-Only Mortgages allows borrowers to make lower monthly payments by only paying the interest balance for the first ten years of the loan.
✔ This type of mortgage is beneficial for property investors and homeowners with fluctuating income, as it provides greater cash flow flexibility and options for managing expenses.
✔ To qualify for this type of mortgage, borrowers need to meet certain credit score and financial requirements, including stable income and a good credit score. Refinancing options may also be available.
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What is a 10-Year Interest-Only Mortgage?
10-Year Interest-Only Mortgages are a type of loan where borrowers make only interest payments for the first ten years, without paying down any principal.
How it works
A 10-year interest-only loan offers a distinctive structure. During the initial term of the loan, which spans 10 years, you are solely responsible for making interest payments on the borrowed amount, without the requirement of principal repayment.
The principal amount remains untouched, allowing you to enjoy lower monthly payments compared to conventional loans. This low-interest payment period gives homeowners and investors alike the ability to manage their cash flow effectively while leveraging their property's equity.
However, after this initial period ends, the loan converts to a traditional amortized loan where both principal and interest must be paid off over the remaining 30-year term of your mortgage.
While this might sound intimidating, rest assured that these loans offer a low fixed rate that is locked in for an impressive 40 years. This mitigates any concerns about potential increases in repayments after the interest-only phase concludes.
Benefits of an interest only loan
A 10-year interest-only loan presents several advantages that may enhance your financial flexibility and investment strategies. Here are some benefits you can enjoy:
✔ Lower Monthly Payments: During the interest-only payment period, you're required to pay only the interest on your loan which results in significantly lower payments compared to traditional mortgages which require principal payments
✔ Greater Cash Flow: The lower payments can free up cash for other immediate needs or investments. This is especially beneficial for homeowners with fluctuating incomes and real estate investors looking to maximize their cash flow.
✔ Flexibility in Payments: With a 10-year-interest only loan, borrowers have the option to make low interest-only payments or fully amortized payments without penalties.
✔ Multiple Property Types: Single Family Homes, Townhouses, Villas, 2-4 Unit Properties, Warrantable Condos, Non-Warrantable Condos including Condo-Tels allowed.
✔ Flexible Occupancy: These loans are available for both owner-occupied and investment properties, providing more choices for borrowers.
✔ Favorable Interest Rates: A key benefit of these types of loans is their typically low-interest rates, locked in over 40 years as offered by Bennett Capital Partners. A Home Equity Line of Credit is usually interest only during the draw period. However, HELOCs are usually variable rates and not fixed.
✔ No Prepayment Penalties: For owner-occupied property loans, there's no prepayment penalty allowing an easy transition to principal repayments or loan disposal when ready.
Risks and considerations of interest-only loans
A 10-year interest-only mortgage journey involves evaluating the potential risks and considerations. One of the foremost risks is that monthly payments will increase substantially after the interest-only period ends.
This transition occurs as your monthly payment begins to include principal repayments, not just the initial interest payment. Another risk lies in uncertain future property values; if your home doesn't appreciate as expected within those first 10 years, you may end up owing more than what it's worth.
Equally important to consider is that these types of loans often carry higher interest rates compared to conventional fixed-rate mortgages, this means over time, you could pay significantly more in total interest cost.
And let's not overlook equity building – or rather lack thereof during your loan's initial term when making only interest payments, thus delaying wealth accumulation in your property value.
Lastly but importantly be aware, refinancing might become challenging unless there’s an appreciation in property value during the loan period.
Who Benefits from a 10-Year Interest-Only Mortgage?
Property investors and real estate professionals can benefit from a 10-year interest-only mortgage by leveraging their cash flow, increasing their rental income, and maximizing their return on investment.
Investors and real estate professionals
As investors and real estate professionals, you can greatly benefit from a 10-year interest-only mortgage. This type of loan allows you to make lower monthly payments for the first 10 years by only paying the interest balance on your mortgage.
With this extra cash flow, you can reinvest in other properties or use it to grow your real estate business. Bennett Capital Partners offers a flexible loan program that caters specifically to property investors and self-employed borrowers like yourself, allowing you to maximize your monthly cash flow while still enjoying the stability of fixed-rate financing.
Plus, with loan amounts available as high as $3 million and various other loan programs offered by Bennett Capital Partners, they have options that suit every investment strategy. Take advantage of this program to expand your portfolio and reach your real estate goals with a 10-year interest-only mortgage.
Homeowners with fluctuating income
As homeowners, we all experience changes in our income from time to time. Whether it's due to fluctuations in a business or variable commission-based earnings, managing monthly cash flow can be challenging.
This is where a 10-Year Interest-Only Mortgage can come in handy. With this mortgage option, you have the flexibility to make low interest-only payments during the initial period, which allows you to manage your expenses effectively when your income fluctuates.
Then, once your income stabilizes or increases, you can switch to fully amortized payments without any penalties.
One great aspect of this loan program is that it offers a fixed interest rate for 40 years—yes, 40 years! This means that regardless of how much interest rates rise over time, you'll have peace of mind knowing that your rate remains unchanged throughout the life of the loan.
How to Qualify for a 10-Year Interest-Only Mortgage
To qualify for a 10-Year Interest-Only Mortgage, borrowers need to meet certain credit score and financial requirements. Lenders will consider factors such as income stability, debt-to-income ratio, and employment history.
Additionally, borrowers may need to provide documentation of their assets and liabilities. It's important to shop around and compare rates and terms from different lenders to find the best option for your specific situation.
Refinancing options may also be available for those who initially choose an interest-only mortgage but later want to switch to a traditional payment structure.
Credit score and financial requirements
When applying for a 10-Year Interest-Only Mortgage, it is important to meet certain credit score and financial requirements. Here's what you need to consider:
✔ Good Credit Score: To qualify for a 10-Year Interest-Only Mortgage, borrowers typically need a credit score of 620 or higher. A higher credit score can increase your chances of approval and help you secure better interest rates.
✔ Income Verification: Borrowers can qualify using traditional full documentation, including pay stubs, W-2s, tax returns, etc. Alternatively, they can utilize alternative income verification methods, such as 12- and 24-month bank statements, DSCR (using the property's rental income to qualify), profit and loss only, and 1099 only.
✔ Debt-to-Income Ratio: Lenders also examine your debt-to-income ratio (DTI). This is the percentage of your monthly income that goes toward paying debts, including your mortgage payment. Ideally, lenders prefer a DTI ratio below 50%, although there are non-QM options available for borrowers with higher DTIs up to 55%.
✔ Financial Reserves: Lenders may require borrowers to have sufficient financial reserves as a safety net in case of unexpected expenses or income fluctuations. Generally, having at least three to six months' worth of mortgage payments in reserves is recommended. This varies across lenders and its best to discuss it with someone at Bennett Capital Partners before applying.
✔ Down Payment: While down payment requirements can vary depending on the lender and loan program, most 10-Year Interest-Only Mortgages require a down payment of at least 20% of the home's purchase price. Higher down payments can reduce the loan amount and improve your loan terms.
Refinancing options for interest-only mortgages
If you currently have an interest-only mortgage and are looking to explore refinancing options, there are a few avenues you can consider. Refinancing can help you secure a lower interest rate, change the terms of your loan, or access equity in your home for other financial needs. Here are some refinancing options to consider:
✔ Traditional Refinancing: You can refinance your interest-only mortgage into a conventional fixed-rate mortgage. This type of refinance allows you to make both principal and interest payments over the life of the loan. It can be a good option if you want to build equity in your home and pay off your mortgage faster.
✔ Adjustable Rate Mortgage (ARM) Refinancing: If you prefer to continue with an interest-only payment structure, refinancing into an adjustable-rate mortgage might be an option for you. An ARM typically offers a fixed interest rate for an initial period (such as 5 or 7 years), followed by periodic adjustments based on market conditions. This option can be advantageous if you plan to sell or refinance before the adjustment period begins.
✔ Cash-out Refinancing: If you're looking to access the equity in your home, cash-out refinancing allows you to refinance your existing interest-only mortgage for an amount greater than what is owed on the property. The excess funds can be used for debt consolidation, home improvements, or other financial goals.
✔ Non-Qualified Mortgage (Non-QM) Refinancing: Non-QM loans provide alternatives for borrowers who may not meet traditional lending criteria but have the ability to repay their loan obligations. Some lenders offer specialized refinancing options specifically designed for borrowers with unconventional income sources or credit profiles.
✔ Government-backed Loan Refinancing: If you have an FHA loan or another government-backed loan, it may be possible to refinance into a 10 Year Interest Only Mortgage. Again, you need to discuss with an experienced broker to determine if there is a benefit of refinancing out of your FHA or other Govt. Backed mortgage. Some benefits would be getting cash out and removing mortgage insurance.
Conclusion
In conclusion, a 10-year interest-only mortgage can be a beneficial option for certain borrowers. It offers flexibility in managing monthly cash flow and the ability to leverage home equity.
However, it's important to assess the risks and consider individual financial goals before opting for this type of loan. With the right lender, qualification process, and understanding of the terms, a 10-year interest-only mortgage can be an advantageous tool for homeowners and property investors alike.
FAQs
What is a 10-year interest-only mortgage?
A 10-year interest-only mortgage is a type of loan where borrowers only make payments towards the interest for the first 10 years. Principal repayments are not required during this initial period, resulting in lower payments.
How does a 10-year interest-only mortgage work?
During the first 10 years of a 10-year interest-only mortgage, borrowers pay only the accumulated interest on their loan amount. After this initial period, regular principal and interest payments kick in, typically at higher rates to compensate for deferred repayment.
Who benefits from a 10-year interest-only mortgage?
A 10-year Interest-Only Mortgage can be beneficial for individuals who anticipate an increase in income or cash flow within the next decade but need immediate access to affordable housing finance options.
Are there any risks associated with a 10-year Interest-Only Mortgage?
Yes, there are risks involved with this type of loan structure. If property values decline and borrowers cannot build equity during the initial period or if they fail to secure favorable refinancing terms after ten years, they may face challenges repaying both principal and increased monthly payments later on.
Philip is the owner and Licensed Mortgage Broker at Bennett Capital Partners, Bus. NMLS # 2046828. He earned his degree in Accounting and Finance from Binghamton University and holds a Master's Degree in Finance from NOVA Southeastern University. With more than 20 years of experience, Philip has been a leader in the mortgage industry. He has personally originated over $2 billion in residential and commercial mortgages.
Learn more about Philip Bennett's background and experience on our Founder's page. Whether you're a first-time homebuyer or a seasoned real estate investor, our team is here to help you achieve your real estate goals. Don't wait any longer, contact us today and let us help you find the right mortgage for your needs.
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