1% Loans

1% loans are increasingly popular in the home loan market - and for a very good reason. They were specifically designed for markets where prices are rising strongly, as in California. It is important to remember that while they may be called 1% loans and that the monthly payment is at that rate to begin with, that isn’t all of the interest that is due to the lender. Rather, what is happening is that some of the interest due is deferred, leaving the low payment at the beginning.

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Another description of this (a more technical one) would be reverse amortization. Instead of the outstanding amount getting smaller each month as you pay off some of the principal and the interest due (amortizing in the jargon) you are only paying interest at that much lower rate. The rest of it is actually added to your outstanding loan. So this is not the same as borrowing money at a 1% interest rate.

1% loans can be extremely useful in at least two circumstances. The first is if you expect that your income will increase strongly in the years ahead. The initial low payments mean you can afford a larger or better house and defer some of the costs until you have your higher income. The second is if you are buying in a vibrant and rising real estate market, like that of California. The low initial payments again mean a more expensive house can be bought and as they tend to go up in value faster than cheaper ones, the extra later expense is easily affordable.

A 1% loan can be a fantastic opportunity for a buyer with low but increasing earning power to grab a great house. As long as you realize that the payments will rise in the future, a 1% loan can be a 100% great option!