Mortgage with option for an annual additional payment. Pros? cons?

So does adding this option to a mortgage usually mean a higher interest rate?

No, penalties for paying your mortgage balance down or off early are illegal for owner occupied real estate. By default extra payments will be applied to paying down the balance, accelerating your amortization, shortening the term, and resulting in all future P&I payments being a little more P and a little less I.

wouldn't I want to have the longest term possible so my required monthly payment is lowest possible but since I'll make large extra annual payments I will have the home paid before the 30 years

In the non-qm space, 40 year fixed with the first 10 years being interest only seems to be growing in popularity. Rate ballpark ~0.25% higher, but payment during that 10 years will be ballpark $100/mo less for every $100k borrowed since that minimum payment is interest only. An i/o payment is just rate*balance/12, so as you pay it down the minimum payment goes down as well. On the 121st payment it becomes a 30 year loan starting at a P&I payment associated with whatever the balance is at that point. Assuming you actually have the discipline to dump extra money into it whenever you get that bonus, tax refund, big commission check, whatever, it can make a lot of sense.

/r/RealEstate Thread