The borrower would be obligated to pay that $278 plus interest each month. For the first few years interest will be low, but then eventually get higher and higher. Conversely, an interest-only ARM is less common. This type of loan puts interest payments in a preset first term of the mortgage, with the actual loaned money (the principal) paid off after that term. Using the example above, during the first five years of an interest- only ARM loan for $100,000, the borrower is only paying interest payments on that $100,000, not the $278 towards the principal. Once that term is up, the next 25 years of payments go towards the principal $100,000. In other words, the borrower spends the first five years making comparatively small monthly payments on interest only, and then the next 25 years paying much larger monthly payments towards the principal. Generally, interest-only loans are only recommended to borrowers who are incredibly responsible with their money and expect to be able to pay the loan off in full faster than the 30-year term. Otherwise, borrowers usually find themselves trapped in a mortgage they can’t afford a few years down the line.
TYPES OF MORTGAGE INSURANCE
Once a borrower decides between a Fixed-Rate Mortgage, an amortizing adjustable-rate mortgage, or an interest-only adjustable-rate mortgage, they must decide on the insurance for the mortgage. There are two types of mortgage loans when it comes to insurance: conventional loans and government-insured loans. The difference between the two types is incredibly simple: government-insured loans come with insurance backed in some way by the federal government, and conventional loans are not
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