What You Need to Know About Mastering the Mortgage Game with California Interest-Only Mortgages
California’s housing market is known for its high prices compared to the rest of the country. For many aspiring homeowners in the Golden State, the dream of buying a house can feel out of reach. But what if there was a type of mortgage with lower monthly payments, helping you to free up cash for other expenses? This is something that’s made possible with California interest-only mortgages.
These mortgages offer a unique approach to homeownership, which we’ll be covering in this guide. Dive in to explore everything you need to know about California interest-only mortgages and discover if this strategy aligns with your financial goals.
What Is an Interest-Only Mortgage?
An interest-only mortgage, also known as an IO mortgage, is a unique home financing option that allows you to pay just the interest on the loan for a set initial period, typically three to 10 years. An interest-only mortgage is considered to be a non-QM loan (non-qualified mortgage) since it doesn’t follow the lending standards set by the Consumer Financial Protection Bureau (CFPB), which is why it has more flexible terms than a conventional loan.
How Does an Interest-Only Mortgage Work?
During the interest-only period, the monthly payments only consist of the interest portion, which results in lower monthly payments. This frees up cash for other expenses or investments. However, it’s important to note that during this time, you aren’t building any equity since there are no principal payments. The principal balance remains unchanged throughout the interest-only period, so once it’s over, the monthly payment will get larger to cover both interest and principal.
Should I Get a California Interest-Only Mortgage?
The answer to this question depends heavily on your individual circumstances. Typically, California interest-only mortgages are recommended for those who expect an increase in income in the near future or are looking for flexibility in monthly payments. This could include, but is not limited to:
- Self-employed individuals
- Freelancers
- High-net-worth individuals
- Contract workers
- Entrepreneurs
- Business owners
- Annual or quarterly commission-based employees
- Real estate investors
- Resident physicians
What Do I Need to Qualify for a California Interest-Only Mortgage?
What you need to qualify for a California interest-only mortgage depends on the lender’s requirements. Since interest-only mortgages are non-QM, each lender can set their own qualification criteria.
While we can’t speak for other lenders, here is what we need at Defy for individuals interested in getting an interest-only mortgage:
- Loan amounts up to $10M+
- Up to 85% LTV
- Minimum FICO score of 620+
- Interest-only fixed rates of 5/7/10 years
- No requirement for a principal paydown
- 30-year or 40-year loan amortization
- Primary, second, or investment properties allowed
Interest-Only Mortgage Interest Rates
Interest-only mortgage interest rates depend on several factors like the lender, your credit score, and current market rates. Most interest-only mortgages offer an option of an adjustable rate (ARM) or a fixed rate. With an adjustable rate, you can expect the loan’s interest rate to fluctuate in tandem with the market rates, whereas a fixed rate remains the same throughout the life of the loan.
Where Can I Get a California Interest-Only Mortgage?
You can get a California interest-only mortgage from banks, credit unions, and private mortgage lenders. Since interest-only mortgages are an alternative lending solution, consider reaching out to a private mortgage lender, like Defy. Private mortgage lenders tend to be more experienced with unique loan types, resulting in potentially faster closing times.
How to Apply for a California Interest-Only Mortgage
If you want to apply for a California interest-only mortgage, but don’t know where to start, here’s a general roadmap to follow:
- Check Your Finances and Gather Documents: Before applying for any loan, it’s a good idea to check your finances to make sure you meet the credit score and down payment requirements. After that, gather any necessary financial documents.
- Research and Compare Lenders: Research lenders in your area that specialize in this loan type. Compare interest rates, terms, and down payment requirements to find the best fit for your situation.
- Apply for a Pre-Approval: Most lenders offer a pre-approval, which gives you an estimated loan amount that you might qualify for. Nowadays, this is typically done online through the lender’s website.
- Find Your Dream Home: Shop for a home with a trusted Realtor and find your dream home.
- Submit a Formal Application and Get Approved: After finding a home, submit a formal application. The lender will then underwrite your application by checking all of your qualifications.
- Closing Day: Once the loan is approved, you’ll go through the closing process. This involves reviewing and signing loan documents, and paying closing costs. After all of this is completed, congrats! The home is now yours.
Pros and Cons of California Interest-Only Mortgages
Pros:
- Lower monthly payments
- Cash flow flexibility
- Faster closing process
- Opportunity to buy your dream home without the large monthly payment
- Pay only the interest on the loan during the initial period
- No requirement for a principal paydown
Cons:
- Limited availability
- The principal balance remains unchanged during the interest-only period
- After the interest-only period is over, the monthly payments get larger to include principal
California Interest-Only Mortgage Alternatives
If you’re looking to buy a home, a California interest-only mortgage isn’t your only option. There are plenty of other options for mortgages for freelancers in California that also include home loans for hourly wage earners and 1099 mortgages. Here are some alternatives to consider:
- Bank Statement Loans: Use your bank statements to qualify. This is a great option for self-employed individuals, including freelancers, gig workers, influencers, and more.
- Profit & Loss Statement (P&L) Loans: Use your business’ P&L statements to qualify. This is a great option for self-employed business owners that have P&L statements produced by a CPA.
- Debt-Service Coverage Ratio (DSCR) Loans: Use your rental property’s income to qualify. This is a great option for real estate investors with income-producing properties.
Still not sure which loan option is right for you? Defy can help! Contact us for a free consultation and we can walk you through all of these loan types and more.
California Interest-Only Mortgage FAQs:
- What is an interest-only mortgage?
An interest-only mortgage is a type of loan where the borrower only pays the interest on the loan for a specified period, typically 5 to 10 years, without paying down any principal during that time. You can also refinance an interest-only mortgage.
- How do interest-only mortgages work?
During the interest-only period, the borrower makes monthly payments that cover only the interest on the loan. After this period ends, the borrower must begin paying both principal and interest, which typically results in higher monthly payments.
- Who should get a California interest-only mortgage?
An interest-only mortgage might be a good fit for Californians with a strong financial plan who want to free up cash flow initially, such as those who anticipate a significant increase in income or plan to sell or refinance before the interest-only period ends.
- Do you build any principal during the interest-only period of an interest-only mortgage?
No, you don’t build principal during the interest-only period. You’re only paying the interest on the loan, so the original balance remains the same.
- Can you make principal payments toward an interest-only mortgage?
Yes, even with an interest-only mortgage, you can usually make additional principal payments towards the loan balance. This can help you reduce the overall loan amount and lower your future monthly payment after the interest-only period ends.
- What are the qualification requirements for a California interest-only mortgage?
Qualification requirements for a California interest-only mortgage may differ between lenders since each lender can set their own criteria. At Defy, this is what we require for our interest-only mortgages:
- Loan amounts up to $10M+
- Up to 85% LTV
- Minimum FICO score of 620+
- Interest-only fixed rates of 5/7/10 years
- No requirement for a principal paydown
- 30-year or 40-year loan amortization
- Primary, second, or investment properties allowed
- Can I get an interest-only mortgage with no down payment?
No, you most likely would not be able to get an interest-only mortgage with no down payment.
- How much of a down payment is required for an interest-only mortgage?
Down payment requirements vary by lender and your qualifications, but you can expect to put down anywhere between 15-30% of the purchase price.
- What’s the minimum credit score to qualify for an interest-only mortgage?
The minimum credit score you need to qualify for an interest-only mortgage depends on the lender. At Defy, we require a minimum FICO score of 620 or above.
- Where can I get a California interest-only mortgage?
You can get a California interest-only mortgage from banks, credit unions, and private mortgage lenders. When shopping for an interest-only mortgage lender, consider private mortgage lenders, like Defy, since they tend to have more experience with alternative loan products.
- Is an interest-only mortgage a traditional mortgage?
No, an interest-only mortgage is not a traditional mortgage. Traditional mortgages have monthly payments that cover both principal and interest from the beginning, whereas interest-only mortgages start off with an interest-only period where only interest payments are required.
- Are interest-only mortgages adjustable-rate mortgages?
Interest-only mortgages can be offered with either fixed or adjustable interest rates. Fixed-rate interest-only mortgages have a set interest rate during the initial interest-only period. Adjustable-rate interest-only mortgages (ARMs) have interest rates that can adjust periodically based on market conditions.
