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Interest Only vs. Amortized Loans

As a San Diego Homeowner looking into a mortgage refinance, or as a potential San Diego homebuyer looking for home purchase financing, it is important to know the difference between the many popular mortgage products.

Your conventional San Diego Home mortgage will be a fully amortized loan. What this means is the loan balance will be broken down into a payment schedule that applies a portion of your monthly mortgage payment towards the principal (amount borrowed) and a portion of the monthly mortgage payment towards the interest charged on the money borrowed. The payment schedule is a sliding scale, with most of your monthly mortgage payment being applied towards interest, and only very little towards principal in the first several years of the loan term. For example, with a conventional 30 year fixed mortgage, you would be paying mostly interest for the first 15 years of the loan, and drastically reducing principal over the last 15 years of the loan term. A fully amortized loan is ideal for a San Diego Homeowner or homebuyer who plans to live in the property for a long period of time with the goal of paying off the mortgage in total.

Another very common loan option is the Interest Only loan. The average San Diego homeowner will sell their property or refinance approx. every 3 years. With a fully amortized loan, you would have paid down your principal balance next to nothing over that amount of time, so lenders created the Interest Only mortgage as an alternative to the young homeowner or property investor looking to keep their payments low, with plans to sell the property and profit on the great appreciation in San Diego experiences. With an interest only loan you are paying only the interest on the principal (money borrowed), which tends to yield a payment approx. $350 less than a fully amortized loan (based on a median loan amount of $410,000). This loan is ideal for people who do not intend to stay in their property for more than 5 years allowing them to keep their cash flow in pocket instead of paying more monthly and reducing the principal balance by only a several thousand dollars over the first five years. Since interest paid on your mortgage is tax deductible by law, your whole interest only payment is a potential tax write-off.