Re-Financing with an Interest Only Mortgage
Interest only mortgages are a moderately new phenomenon in the
re-financing industry as well as the home buying industry. 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 exchange for more cash flow each month, the homeowner may be
sacrificing the ability to obtain a fixed rate mortgage as well as
the ability 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 Monthly Cash Flow
The one key benefit for many homeowners in an interest only mortgage
is the ability to increase monthly cash flow. Homeowners who
re-finance by utilizing an interest only mortgage will likely have
more money available each month because they will only be paying
interest on their mortgage initially. The reduction of the principal
payment can make it easier for the homeowner to either afford a
larger house or have the ability to live more extravagantly on their
budget. However, there is often a significant price to pay for these
types of re-financing options.
While interest only loans may not be best, they can be beneficial in
the situation where the homeowner is having a great deal fulfilling
his monthly obligations. In this case, the homeowner may be willing
to sacrifice an overall financial loss for the ability to continue
to pay monthly bills in a timely fashion.
Unknown Risks of an ARM
Interest only re-finance loans are usually offered with an
adjustable rate mortgage (ARM) this means the interest rate is not
fixed and may vary with the rise and fall of the prime index. This
risk can be quite costly for the homeowner if the interest rate
rises significantly. There is usually a cap 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 mistake for the homeowners.
An ARM re-finance option with an interest only component may be
valuable in some situations. For example if the homeowner has a
hybrid mortgage which highlights a fixed interest rate during the
interest only portion and an ARM during the principal and interest
portion of the loan they might benefit from this situation if they
do not plan to stay in the home for longer than the interest only
period. This period may vary depending on the lender and the
circumstances. Homeowners who plan to sell the house before the
interest only period ends and the ARM period begins enjoy 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 varying interest rates.
No Equity in the Home
Another disadvantage to the interest only re-finance loans is they
do not permit 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 dillema for homeowners who are looking to profit through
the sale of their home. These homeowners may find the participation
in an interest only re-finance has had a damaging effect on the
profit they are able to generate from the resale of their home.
Back to San Diego downtown real estate article index |
