Can you explain the interest only concept in Mortgages?


A mortgage consist of PITI.

what piti mortgage means

P = Principal (the amount borrowed that with this payment will be paid down little by little each month)

I = Interest (the cost to you of borrowing the money)

T = Taxes (annual cost levied by county for infrastructure cost)

I = Insurance (required by lender to protect their loan of money to you & to protect you should something happen)

Escrows:

escrow includes taxes and insurance
TI or Taxes and Insurance are called your "escrows". Meaning the bank collects it for you and pays the county and insurance company each year when it comes due. It is possible to get a mortgage where they don't escrow for you and you pay the Taxes and Insurance annually (usually your interest is a little higher when there are not escrows included in the monthly payment). So you can have a monthly mortgage payment that includes Principle and Interest and 1/12 (one-twelfth) the annual Taxes and Insurance or a monthly mortgage payment that is just Principal and Interest (thus a lower payment) and you will billed annually directly from the county and insurance company for the Taxes and Insurance.

Interest Only:

interest only mortgage
On a Interest only mortgage you pay ITI or Interest, Taxes and Insurance. You don't pay the "P" principal. So that the amount borrowed never goes down and when you sell the house the principal (amount borrowed) is the same as when you original purchased the home. This gets your payment lower (no Principal paid each month) and could work out to your benefit as long as home values are not declining or stabilizing.

Effect of interest only mortgage in declining or stabilizing market

effects of interest only mortgage
If home values are declining or stabilizing then it means you may have to bring money to the table when you sell because the mortgage could be greater then the price you sell your home plus the cost of the sale. Don't get me wrong, if you were in a declining market then there is still the possibility of your mortgage exceeding the price you sell your home for plus the cost of the sale even if you were paying principle down.

A note about paying down princIpal on a mortgage

paying down the principal on the mortgage
Please be aware that the majority of the loans allow you to pay down principal on the interest-only mortgage, it is just not a requirement of each mortgage payment. So you could decide to pay down principle on any and all monthly mortgage payment you make (if allowable by the mortgage lender).

Numbers are for explanation purposes only:

PITI on $300,000 at 6% in Duval County on a $300,000 purchase: $1798 (PI) +$527.24 (TI) = $2325.24 approx

ITI on $300,000 at 6% in Duval County on a $300,000 purchase: $1500 (I) +$527.24 (TI) = $2027.24 approx

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