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Detailed explanation of the FREEandCLEAR.com Interest Only Mortgage Calculator which allows you to determine your initial monthly payment, potential future payments and total interest expense over the life of the loan for an interest only mortgage. The FREEandCLEAR interest only mortgage calculator also enables you to review potential future scenarios including the worst case scenario for an interest only mortgage. Visit to learn more and to master the mortgage process.

We’re going to review the free and clear calm interest-only mortgage calculator which is a mortgage calculator that allows you to determine your initial monthly payment potential future payments and total interest expense over the life of the loan for an interest-only mortgage the free and clear interest only mortgage calculator also enables you to review potential

Scenarios including the worst-case scenario for an interest-only mortgage to find the interest-only mortgage calculator simply click on the mortgage calculator tab on the top left of any page on free and clear calm and that will take you to a page that lists all the calculators available on free and clear the interest-only mortgage calculator is located under

Mortgage program calculators and if you click on the triangle to the right of the calculator title it reveals a brief description of the calculator i’m going to click on the calculator title and that will take us to the calculator page i’m going to briefly review an interest-only mortgage before i walk through the calculator step by step it’s just only mortgages

Have an initial interest only period typically for the first three five seven or ten years of the mortgage when the borrower pays only interest and no principal at a fixed interest rate following the interest only period the mortgage converts into an annual adjustable rate mortgage when the interest rate can change every year for the remainder of the term of the

Mortgage this is known as the adjustable rate period these mortgages are called 315 171 and 10 one interest only arms or io arms for short so in the case of a 71 interest only arm the borrower pays only interest at a fixed interest rate for the first seven years of the mortgage and then pays both principal and interest for the remaining 23 years the mortgage at

An interest rate that is subject to change typically on an annual basis the mortgage payment during the interest-only period is typically less than the mortgage payment for a loan such as a fixed-rate mortgage or an adjustable rate mortgage when the borrower is paying both interest and principal the interest rate for the adjustable rate period which follows the

Interest-only period is called the fully index rate and is calculated by adding the margin which is fixed over the life the loan to the index which is an underlying interest rate that can change this means that the fully index interest rate and your monthly mortgage payment can change and potentially go up over the life of the mortgage because it is impossible to

Predict future interest rates we do not know exactly what the payments for an interest-only mortgage will be after the interest-only period but we can review multiple scenarios to understand potential outcomes i’m going to walk through the calculator now as you can see from the way the page is laid out the apis to the calculator are on the left side of the page

And outputs to the calculator on the right side of the page the inputs are the information that you provide or select and the outputs are provided by the calculator after you click the calculate but it’s important to highlight that if you ever have a question about an input simply hover your cursor over the icon to the left of any input rectangle and it reveals a

Brief description of the input and information required the first input is mortgage amount i’m going to use 300,000 dollars in this example the next input is mortgage term or the length of the mortgage in years i’m going to select 30 years in this example because that is the most common term for an interest-only mortgage the next input is the interest only period

Or the length of the initial period for an interest only mortgage during which the borrower pays only interest and no principal and the interest rate is fixed the interest only period is typically 3 5 7 or 10 years if you click on the drop-down menu it shows a range of odd and i’m going to select seven years in this example so our mortgage is a 71 interest only

Are the next input is interested only period interest rate this is the interest rate you pay during the initial period of your mortgage which is seven years in this example so the starting interest rate for your loan if you hover your cursor over the icon to the left or the drop down menu it shows the current interest only interest rate for 71 interest only arm in

This case the interest rate is approximately three point three seven five percent if you click on the drop down menu it reveals a range of options and i’m going to select three point three seven five percent the next input is adjustment period this determines how frequently our interest rate will adjust during the adjustable rate period of the mortgage so after

The fixed rate period if you click on the drop down menu it shows two options annual or semiannual and i’m going to select annual because that is the most common adjustment period for an interest-only arm so the interest rate for our mortgage can change every year the next input is interested only arm index this is the underlying interest rate that is one of two

Components of the fully index rate and this rate can change over the life of the mortgage lenders typically use the one year library or one your treasury note for the index i’m going to select one year treasury note the next input is the current rate for the index you have selected if you hover your cursor over the icon to the left of the input rectangle it shows

The current rates for the one year libor + 1 year treasury note the current one your library is point 5 90 percent and the current one your treasury note is point one one zero percent we have selected the one-year treasury note in the previous input so i’m going to use point 110 the next input is the interest only our margin which is a fixed rate over the life alone

That is to the index determine the fully index rate which is our interest rate during the adjustable rate period of the loan i’m going to select 2.2 50 in this example the next input is the initial adjustment cap which is a cat that limits the change in interest rate for the initial adjustment period following the interest-only period so in this case your eight of

Our mortgage the initial adjustment cap varies depending on the length of the interest-only period and i’m going to select five percent in this example the next input is the subsequent adjustment cap which is the cat that limits the change in the fully index rate in any adjustment period following the initial adjustment period so years 9 through 30 in this example

I’m going to open the drop-down menu and select two percent our final input is life cap which is a cap that limits the maximum increase in interest rate over the term of the mortgage i’m going to select seven percent in this case so because we selected three point 375 for initial interest rate the maximum interest rate for our mortgage over the life of the loan is

10.3 75 we have submitted all of our inputs i’m going to click on the calculate button which will produce our outputs the first output shows the estimated monthly mortgage payment during the interest-only period so this will be our mortgage payment for the first seven years of the loan we’re paying only interests and no principal the next set of outputs shows the

Current fully indexed rate scenario in this scenario we use the current fully indexed interest rate or two point three six percent as our interest rate throughout the adjustable rate period so for the final 23 years of the mortgage although it is highly unlikely that the interest rate does not change over the adjustable rate period this scenario gives us a sense

Of what our interest only mortgage could look like in the future first we show the current fully index ray based on our inputs and then we showed the estimated monthly mortgage payment using the current fully index rate as you can see even though the interest rate goes down as compared to the interest-only period interest rate our mortgage payment goes up because

Now we are paying both principal and interest and not only interest we also show total interest expense over the life of the mortgage including both the initial interest only period and the adjustable rate period using the current fully index rate the next scenario is the worst-case scenario which shows what a mortgage would be like if the interest rate reached

Its maximum level as soon as possible again this is a highly unlikely scenario but it prepares you for the unfortunate situation if interest rates increase significantly and rapidly the first output in this scenario shows the maximum interest rate at the first adjustment period which is eight point three seven five percent in this case the next output shows the

Estimated monthly mortgage payment based on this interest rate so you can see a significant increase on a monthly payment as compared to both the interest-only period and the current fully indexed rate scenario which is because her interest rate has gone up significantly the next output shows the maximum interest rate over the life of the mortgage which is ten

Point three eight percent in this example and the following output shows the first month when this maximum interest rate could potentially apply or month 97 in this example which is at the beginning of year nine of our mortgage the next output is the estimated monthly mortgage payment based on this maximum interest rate as you can see this payment is higher than

Even the estimated mortgage payment at the first rate adjustment the final output is total interest expense over the life of the mortgage including both the initial interest only period and the adjustable rate period assuming the interest rate increases as much as possible as quickly as possible as you can see this amount of interest is significantly higher than

The amount of interest in our current fully indexed rate scenario it’s important to highlight that you can change the calculator inputs without having to refresh the page so if i change our interest only interest rate from three point three seven five to five percent and click the calculate button or outputs update automatically without having to refresh the page

After you’ve reviewed the calculator scenarios that apply to you you can click on the compare lenders button at the bottom of the outputs and review a table with interest rates and fees for lenders in your area if you’re interested in an interest-only loan you can click loan type on the left side of the page and select arm io in this case i’m going to select a

Seven-year interest only honor and the table updates automatically if you have any questions about the free and clear interest only mortgage calculator or any mortgage topic you can always click on the ask an expert button at the top of any page and it will take you to the free and clear ask a mortgage expert feature where you can submit your question the feature

Is free to use and we never spam we also encourage you to check out our detailed discussion of interest only mortgages in a mortgage program section and interest only mortgage acceleration in our free and clear mortgage acceleration section thank you for reviewing the free and clear interest only mortgage calculator

Transcribed from video

Interest Only Mortgage Calculator Video By FREEandCLEAR Mortgage Channel