Refinancing a Home Loan with an Interest Only Option
If you’re thinking of refinancing a home loan with an interest only option, there are a few things to consider before you come to a decision on this kind of loan. There is no such thing as an interest only mortgage. Eventually you pay the loan principle as well. There is however, an interest only payment method that some people can use.
The interest only option for refinancing a mortgage has advantages as well as drawbacks. By not paying the principle now means you will have to pay it later. On a mortgage it has been the standard in the past that most of your payment would go towards the interest, but with the low interest rates now this changes the factor.
An interest only loan allows you to pay towards the interest only, for a specific period of time. This means that there is no requirement to repay the principle at first, although the option is there if you want to do so. The borrower thinks that if he makes bigger payments on a loan such as this he is decreasing the principle but this is not always so. In fact an interest only loan can be compared to an ARM loan in lots of ways. If the rate of the interest on the non- interest only version is higher, which is almost always the case, it will amortize less rapidly than the non-interest only version.
Borrowers often confuse the interest only period with the initial-rate period of the ARM to which the interest only is attached. You may find that this will not be pointed out to you when you apply for this type of loan. Borrowers that take out this kind of loan think they are safe with their rate for 10 years, but this is not the case. You should certainly do some research into this before you make any decisions.
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