Home Mortgag eRefinancing Options: Interest Only Loan Refinancing

Home Mortgage Refinancing: Interest Only Refinancing Generally

Interest only loans are well known for their high risk, especially and there are many considerations for a borrower before she signs the loan papers. This mortgage is one where you pay only the interest for an initial period in the life of the loan with no contribution toward principal, and is mostly a very bad situation for most homeowners.

The History of Interest Only Refinancing and Home Mortgage Refinancing

Before the depressions years when this loan was introduced, it was a popular mortgage. However, the depression caused many foreclosures and led lenders to rely on the traditional 30 year fixed rate mortgage. Our new interest only loans are different in that they are not interest only for the life of the loan, but for only a few years. At the end of the initial period the homeowner has to refinance or the payment is raised to where it should be based on his principal (which, by the way, has not been paid down).

The ARM and Home Mortgage Refinancing

If the concept itself doesn’t make this loan appear risky enough, now there are adjustable rate interest only loans. ARMs are higher risk than a fixed rate mortgage anyway because a borrower doesn’t have a specific idea of where the rates will be when his interest rate goes up. With an interest only ARM, the new rate is based on the same amount of principal as the initial period of the loan, just with a higher interest rate. Except for some small details, it seems as if the borrower has the limited advantages of the renter but the full responsibilities of the homeowner!

Interest Rates, Home Mortgage Refinancing and Interest Only Refinancing

Due to the higher risk, the interest rates are also higher on an interest only loan. Refinancing to this loan from any other loan is a huge step backward. You are increasing your risk, losing your equity accumulation (and therefore wealth), and may end up with a principal-interest payment over 150% above your payments in the initial period of the loan.

Who Benefits from Home Mortgage Refinancing and Interest Only Refinancing?

Interest only loans are for borrowers who either have sporadic income, where they would pay down the principal in large sums once or twice a year, for homeowners who need the cash for an investment with a large payoff, or for the borrower who can only qualify for the lower payments but has (or soon will have) the income to pay down the principal as if it were a fixed rate mortgage. As you can imagine, very few fit into these categories.

Consult a Specialist

Even if you find that you are in one of the above categories, always check with a financial specialist to make sure there isn’t a better loan product out there for you. If you have any small bit of doubt when you compile your information, go with another loan product.