Mortgage Rate News

Every now and again, we get a reader question that can be answered on the mortgage loan blog. And we are always happy to oblige. Today’s mortgage loan blog reader question has to do with the interest-only home loan:

I have an interest only 15 year mortgage, need to build up equity,
please advise how much should I pay to build up my equity and get this
home paid off.

First of all, it is great that you recognize the importance of building equity and trying to get out from under the interest-only home loan. Right now, you are only paying interest on your loan, and this means that at some point you are going to have major payments when the principal is added in. So working on it now is a good start.

Since I don’t know the particulars of your home mortgage (amount, etc.) there are only a few rules of thumb I can offer you. First of all, a general rule of thumb is that your housing payment should be about 1/4 of your monthly income. So, you can figure your monthly income and divide it by four. That is the amount you should be spending on your housing payment. Let’s say you make $4,000 a month. Your housing payment should be $1,000. Say you are paying $450 in interest. Subtract the $450 from the $1,000 and you end up with $550. You should put this $550 toward the principal.

Do this by writing two separate checks. The first should be your regular interest-only loan payment. The second should be for the amount that goes to the principal. In the “memo” line of the check, write “for principal” or “apply to principal.” This gives clear instructions that your principal check should go toward what you owe on the home.

Some things to be aware of regarding your interest-only home loan

If you got an interest-only home loan and the interest is 1/4 of your income, you could be in trouble. Put whatever you can toward the principal. Additionally, if you are in debt heavily to other creditors, you could be in trouble as well. Pay your obligations (minimum payments) and then put what you can toward the principal. You need to get your home mortgage loan balance down.

Also, it is important to understand that some home mortgage loans have prepayment penalties. It might be expensive to pay off your loan before the end of the 15 years. But any amount you can reduce the principal by now will make things less difficult when the intro period is over and you are required to start paying on the principal.

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