Refinancing: Interest Only Option

Refinancing: Interest Only Option

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Refinancing or buying a home with interest only mortgage is a pretty new thing. While the appeal of an interest only mortgage is typically a greater monthly cash flow, this increased cash flow can come with a hefty price tag. In turn, the homeowner won’t be able to get a fixed rate mortgage nor build equity. Read on to know more about this interest only mortgage.

Greater Monthly Cash Flow

The one main advantage for many homeowners in an interest only mortgage is the ability to increase monthly cash flow. Since the only fee homeowners need to pay for at first is the interest, there is greater monthly cash flow for them. This means that the homeowner has a bigger monthly budget or he could also afford a bigger house. However, there is often a significant price to pay for these types of re-financing options.

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While interest only loans may not be ideal, they can be beneficial in the situation where the homeowner is having a great deal fulfilling his monthly obligations. This means that the homeowner would have to lose money in the end for him to pay his monthly dues on time.

Adjustable Rate Mortgage (ARM) and Its Risks

Adjustable rate mortgage or ARM usually comes along with interest only loans, which involve an unfixed interest rate. This can cost the homeowner much if the interest rate was to rise. There is a limit, but this limit is in percentage, so it could still be a lot of money.

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Homeowners can at least benefit from an interest only loan without the ARM option in some situations. Take for example if a homeowner has a loan that involves a fixed interest rate for the interest only portion and an ARM for the principal and interest part of the loan, he is at an advantage if he won’t stay at the house for longer than the interest only period. The period will depend on the lender and the situation. A homeowner will enjoy low monthly payments and fixed rates for the interest if he sells the house before the interest period is over and before the ARM period will begin.

No Equity in the Home

Another disadvantage to the interest only re-finance loans is they do not allow the homeowner to build equity in the home during the initial period where only the interest on the loan is repaid. This can be a problem for homeowners who are looking to profit through the sale of their home. The people may think that’s an interest only loan may not be ideal for them, after all.

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