Interest Only Refinance

An interest only refinance was a very appealing option for many first-time homeowners during the heydays before the housing and banking crisis that began in 2006. This option provided flexibility of payments useful to many whose intention it was to secure investment property for relatively quick resale, or for those who found interest only refinance a viable path to obtaining, or maintaining, a very important part of the American dream—home ownership. But what started as a tide that raised all ships, soon turned into a tsunami of foreclosures and defaults—a cautionary tale for those who may be considering interest only finance as a loan option. Albeit, interest only loan packages, including interest only refinance, was seen by some as a logical alternative to conventional loans.

Interest Only Refinance – What is it?

Interest Only Refinance

Interest Only Refinance

To answer the question, “What is interest only refinancing” it would only be logical to first ask, “What is interest only financing?” The concise answer is that interest only financing is a loan that only requires the borrower to repay the interest on a loan, usually for a specified period, after which the terms of repayment are reset. The option to repay interest only usually last five to ten years. Payment on the principal is deferred, giving the borrower some relief financially, by reducing monthly payments by up to one hundred dollars in some instances. The balance, however, remains unchanged. The borrower, of course, also has the option to pay the principal, along with the interest, during the interest-only period of the loan repayment. As mentioned earlier, interest only financing provided the leverage for first-time homeowners to realize their dreams of owning property. Some used this vehicle as a way to trade up in obtaining another home. But, for many, interest only refinance was also a way to stave off financial ruin in very difficult times.

Interest Only Refinance – Additional Items to Note

An interest only refinance mortgage is a viable option for those whose financial situation has taken a turn for the worse. Refinancing that fully amortized loan to a more manageable interest only package, may buy some borrowers time while they reorganize financially. A 30-year interest only loan of $100,000 at 6.25%, for example, only has the required monthly payment of $520.83, compared to the fully amortized loan (includes principal), which would have a monthly payment of $615.72. That is a difference of $94.88, which is the remaining monthly principal. Interest only finance rates are fixed for up to the first ten years. But borrowers should be aware that, since payment on the principal is effectively deferred, when the term of the loan resets, their monthly payment might be significantly higher. Also, during the period of interest only repayment, no equity is being built, since the principal is not being paid down. This may make refinancing a challenge, and selling your home not as profitable.

Interest Only Refinance – The Dangers

Most interest only refinance rates are associated with adjustable rate mortgages. In a very volatile market, this type of loan exposes the borrowers to certain risks like steep rate increases. A precipitous drop in home prices may, therefore, see huge upward swings in rates, leaving the borrower paying much more than the house is worth. For this reason, homes that have been obtained by interest only refinance have a higher rate of foreclosure than homes financed under different loan structures. The take-away message here is that prospective home buyer should consider very carefully the risks and perceived advantage of interest only finance or interest only refinance.

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