Re-Financing with an Interest Only Mortgage

Mortgage refinancing is the process of paying off one loan with the proceeds from a new loan, using the same property as security. People choose to refinance their home when current rates are lower than their preexisting rates on a particular home loan. Interest only mortgages are a comparatively new phenomenon in the re-financing industry as well as the house purchasing industry. While the appeal of an interest only mortgage is normally a greater every month cash flow, this increased cash flow may come with a hefty price tag. In exchange for more cash flow monthly, the householder perhaps sacrificing the power to get a fixed rate mortgage as well as the power to build equity. This article will further examine these features to provide the reader with more information on the subject of interest only mortgages.

Greater every month Cash Flow

The one main advantage for many householders in an interest only mortgage is the power to increase every month cash flow. Householders who re-finance by utilizing an interest only mortgage will likely have more money available monthly because they’ll only be paying interest on their mortgage initially. The reduction of the principal payment may make it easier for the householder to either afford a larger house or have the ability to live more extravagantly on their budget. However, there’s often a significant cost to pay for these types of re-financing alternatives.

While interest only loans may not be ideal, they perhaps beneficial in the situation where the householder is having a great deal fulfilling his every month responsibilities. In this case, the householder possibly willing to sacrifice an overall financial loss for the power to continue to pay every month bills in a timely fashion.

Unknown Risks of an ARM

Interest only re-finance loans are generally offered with an adjustable rate mortgage (ARM) this means the rate of interest isn’t fixed and may waver with the rise and fall of the prime index. This risk may be quite costly for the householder if the rate of interest rises importantly. There’s normally a cap placed on the amount, in terms of percentage, the rate of interest may rise in a sure period but this may still be a very pricey mistake for the householders.

An ARM re-finance alternative with an interest only component perhaps worthwhile in a few situations. E.g. if the householder has a hybrid mortgage which features a fixed rate of interest during the interest only portion and an ARM during the principal and interest portion of the loan they might profit from this situation if they don’t plan to stay in the home for longer than the interest only period. This period may vary depending on the loaner and the circumstances. Householders who plan to sell the house before the interest only period ends and the ARM period begins enjoy the profits of lower every month payments and the security of fixed rates of interest before they ever have to worry about refunding the principal or dealing with the varying rates of interest.

No Equity in the Home

Another disadvantage to the interest only re-finance loans is they don’t allow the householder to build equity in the house during the initial period where only the interest on the loan is repaid. This may be a trouble for householders who are looking for benefit through the sale of their house. These householders may find the participation in an interest only re-finance has had a damaging effect on the benefit they’re able to generate from the resale of their house.