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Interest
Only Financing |
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 Interest-only
loans are available with 1 month or 3,5,7, & 10 year terms, all
amortized over 30 years but the rates are only fixed for a time.
You only pay the interest on the money you borrow. That means the
principal balance remains the same, unless you choose to make
principal payments, which you can do at any time.
To figure out
a payment, let's say you borrow $333,700 for 7 years at 4.625%.
$333,700 x
4.625% = $15,433.63 (this is your yearly interest) now you divide
the $15,433.63 by 12 months = $1286.14 (this is your monthly
payment)
There is a 10
year interest-only mortgage available that has a fixed rate for the
entire thirty years. For the first ten years you pay the interest,
then in he last twenty years the loan is amortized (paid back) over
20 years. So your new payment would be based on a twenty year loan
(the payment's going to go up) but the rate stays the same.
What is the
benefit of an interest-only loan? You get low monthly payments,
which means more cash for other investments. Here's an example of a
good use of an interest-only loan: You have lived in your home for
two or more years. You can rent it for $500 more than your new
interest-only payment after you take out a bunch of money for a big
down payment on a new, bigger house. You move into your new, big
house and rent out your old house for three more years, then sell
that house for a lot more than you would have sold it for now, three
years later, tax free. (As long as you live in your house for two
of the five years you own it you can sell it without paying capital
gains.)
If that house
you rented is worth $300,000 now and you make $500 per month for the
next three years and they sell it for $400,000, you just made an
extra $100,000. This kind of risk works in an appreciating market.
We will leave it up to you to decide if the market is appreciating
or not. You should talk to your tax accountant or CPA to determine
if you are in a position to take advantage of this type of program.
If you do not have a good CPA call me and I'll give you a number to
a great CPA.
Ever wonder what all those
indexes mean? The definition of each is
listed below, and
each fund index is explained after...
Index Definitions
COFI: 11th District Cost of Funds Index
COSI: Cost of Savings Index
MTA: 12-Month Treasury Average
Libor: London Inter Bank Offering Rates
Prime: Prime Rate
RNY: Fannie Mae's Required Net Yield
FMac 30yr Avg: Freddie Mac's 30-Year Fixed
Fed Funds: Federal Funds Rate
TBond: U.S. Treasury Bond
COFI: 11th District Cost of Funds Index
Published by
The
Federal Home Loan Bank of San Francisco, COFI is the acronym for
the 11th District Monthly Weighted Average Cost of Funds Index. The
COFI is not an interest rate. It reflects the interest expenses
reported for a given month by the COFI Reporting Members, as
described below. The interest expenses are incurred from the COFI
Reporting Members' various sources of funds. Deposits -- including
checking and savings accounts, certificates of deposit, money market
deposit accounts, transaction accounts, and passbook accounts
(collectively known as "Deposit Accounts") -- are the primary source
of funds for most savings institutions. Other sources of funds
include loans obtained through the credit program of the Bank (known
as "advances") and from other sources.
more info...
COSI : Cost of Savings Index
Golden West Financial
Corporation is the parent company of
World Savings.
World Savings borrows money from consumers in the form of deposits
and then lends the money out as home mortgages. The interest rates
in effect on these deposits are the basis for the Cost of Savings
Index (COSI). The COSI is not based on actual interest paid on
deposit accounts, but rather on a weighted annualized rate of all
interest rates in effect on deposit accounts as of the last day of
each month.
WHEN IS THE INDEX ANNOUNCED? Golden West computes the COSI as of the
last day of each calendar month and announces it on or near the last
business day prior to the fifteenth day of the following calendar
month. For example, Golden West announces the February COSI on or
near the last business day prior to the fifteenth of March. It is in
effect until the announcement of the March COSI in April.
HOW IS COSI CALCULATED? The monthly index is a ratio of monthly
interest costs to total funds, expressed as a percentage. Annualized
interest, the numerator, is calculated by multiplying the deposit
balances at the end of each month by the weighted average interest
rate of each account type that was effective on the last day of the
month. Total deposits, the denominator, is the total balance of
deposits on the last day of the month. The quotient resulting from
dividing the annual-iz-ed interest by total deposits, multiplied by
100 and expressed, as a percentage, is the Weighted Average Cost of
Savings (COSI) COSI Calculation
MTA: 12-Month Treasury Average Index.
12-MTA index is based on yields published in the release entitled
the "Selected Interest Rates-H-15" which is published by the Federal
Reserve Board on the first Tuesday of each month. The investor
performs a simple calculation of averaging the preceding 12-month
annual yield to come up with the current index value that is
published on the pricing guide." More
info at Google Answers...
LIBOR: London Inter-Bank Offered Rate
LIBOR stands for "London Inter-Bank Offered Rate." It is based on
rates that contributor banks in London offer each other for
inter-bank deposits. From a bank's perspective, deposits are simply
funds that are loaned to them. So in effect, a LIBOR is a rate at
which a fellow London bank can borrow money from other banks. Rate
calculations are complex as they incorporate variables such as time,
maturity and currency rates. There are hundreds of LIBOR rates
reported each month in numerous currencies. We only report the 1
Year LIBOR as published monthly by Fannie Mae. This is a LIBOR for a
one year deposit in U.S. Dollars during a given month.
More info at Google Answers...
Prime: Prime Rate
The Prime Rate is the interest rate charged by banks for short-term
loans to their most creditworthy customers whose credit standing is
so high that little risk to the lender is involved. Only a small
percentage of customers qualify for the prime rate, which tends to
be the lowest going interest rate and thus serves as a basis for
other, higher risk loans. The rate is almost always the same amongst
major banks. Adjustments to the prime rate are made by banks at the
same time; although, the prime rate does not adjust on any regular
basis. The prime rate is not very volatile index however it
generally rises quickly but declines very slowly.
More info at Google Answers...
RNY:
Fannie Mae's
Required Net Yields
RNY represents Fannie Mae's required net yield for 30-year,
Actual/Actual Remittance fixed-rate mortgages covered by 60-day
mandatory delivery whole loan commitments. The yield is in effect on
the first business day of the month. This yield is provided each
day, so this does not represent an average or a monthly rate. It is
provided to show you a history of this yield only and is not an
actual index
Fixed:
Freddie Mac's
30-Year Fixed Rate
Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate
Mortgages. (note: points not listed in charts generated by this
website).
more info...Fixed: Federal Funds Rate
The interest rate at which a depository institution lends
immediately available funds (balances at the Federal Reserve) to
another depository institution overnight.
more info...
Fixed: Treasury Bonds
Treasury bonds are debt issued by the U.S. government. They are
issued in $1000 denominations and mature in anywhere from three
months to 10 years (The Treasury Department is no longer issuing any
new 30-year bonds to finance or refinance our budget deficits or
national debt).
more info...
more info2...
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