Glossary: Interest Only Loan – Interest Rate Index

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• Interest Only Loan – a mortgage that only requires the payment of interest. None of the money owed monthly is put against the principal amount owing unless an additional amount is paid. This type of loan is particularly suited for individuals who have sporadic income because they can pay the interest in the lean times and then pay more in the good times so that the principal gets paid down as well. If money over and above the monthly payment is not paid, the borrower will not gain any equity in their house unless property values increase.
• Interest Rate Index – a method used by lenders to help them determine their rate of interest for short-term adjustable rate mortgages. A Treasury note of a comparable term length is used as a control. For example, if the ARM is for 10-year term, the lender will use the US Treasury product that matures 10 years from the anticipated closing date in his calculations. The Index is updated regularly and widely available.

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