Interest Only Mortgage Re-Financing

Interest only mortgages are quite a new phenomenon in the re-financing as well as the home buying industry. Whilst the appeal of an interest only mortgage is typically a greater monthly cash flow, this increased cash flow can have a costly price tag attached to it. In exchange for a bigger monthly cash flow, the homeowner might be sacrificing the possibility to get a fixed mortgage rate as well as the ability to construct equity. This article will examine these features further in order to provide the reader with some more information regarding the subject of interest only mortgages.

Larger Monthly Cash Flow

The one main benefit for many homeowners in an interest only mortgage is the possibility to increase their monthly cash flow. Homeowners who decide to re-finance through the use of an interest only mortgage will very likely have more money available each month because they will only be paying an initial interest on their mortgage. The reduction of the principal payment can make it a lot more easy for the homeowner to either afford a larger house or have the ability to live more expensively on their budget. Nevertheless, there are often significant prices to pay for these types of re-financing options.

Whilst interest only loans may not be the best solution, they can be a great benefit in the situation where the homeowner needs a great deal in order to fulfil his monthly obligations. In this event, the homeowner might be willing to sacrifice an overall financial loss for the possibility to continue to pay monthly bills on time.

ARM’s unknown risks

Interest only re-finance loans are usually offered with an adjustable rate mortgage (ARM) which implies that the interest rate might not be fixed and might vary with the rise and fall of the prime index. This risk can be quite expensive for the homeowner if the interest rate goes up drastically. Usually, there is a cap which is placed on the amount, in terms of percentage, the interest rate can rise in a certain period but this can still be a very costly error for the homeowners.

An option for ARM re-finance with an interest only component might be worthwhile in some situations. For instance, if the homeowner has a hybrid mortgage which features a fixed interest rate during the interest only portion and an ARM during the principal and interest portion of the loan they might find this situation advantageous if they don’t plan to stay in the home for longer than the interest only period. This period may fluctuate depending on the lender and the circumstances. Homeowners who plan to sell the house before the interest only period ends and the ARM period will begin to make the most of the benefits of lower monthly payments and the security of fixed interest rates before they ever have to worry about repaying the principal or dealing with the fluctuating interest rates.

No Equity in the Home

Another drawback to the interest only re-finance loans is that they don’t allow the homeowner to build equity in the home during the initial period where only the interest on the loan is paid back. This can be a problem for homeowners who are looking to make a profit from the sale of their home. These homeowners might find that the participation in an interest only re-finance might’ve had a damaging effect on the profit they are able to make from reselling their home.

Article Source: http://www.debtfinancearticles.com.

About the Author:
Gemma Markby is a contributing real estate editor at http://www.debtfinancearticles.com/. This article may be reproduced provided that its complete content, links and author byline are kept intact and unchanged. No additional links permitted. Hyperlinks and/or URLs must remain both human clickable and search engine spiderable.