Interest Only Loan Refinance

Before I talk about an Interest Only Loan Refinance, let me say side note about it. This mortgage tool can be good, and it can be bad. If you are considering doing this type of loan because you are tight on cash, you should really think twice about doing this. For people who are financially well set and want more control of their cash flow, then this type of refinance can be a good plan. There are many types of Interest Only Loans, and I will talk about some of the more important ones. Lets get a good view on what an Interest Only Loan Refinance actually means. A regular home mortgage payment will pay the interest and principal. As time goes on, your payment stays the same, but the principal of your loan gets paid down faster. In mortgage loans, they put a large portion of your payment towards the interest you owe first. Now, in an IO (Interest Only) Loan, you are strictly paying the interest only. Sounds pretty straight forward. Because you are only paying the interest on the loan, your loan payments are lower than a traditional mortgage loan. There are fixed rate IO loans and also adjustable rates. The length of this loan being interest only can vary, and it is usually between 5 and 10 years. After that period, the loan will then switch over and it will become a traditional loan where you are now paying against the principal. The main reason people get an interest only refinance is because they want to lower their home payment and be in more control of what they pay.

How can this type of loan be bad? Well for starters, the majority of people who get this loan do not know the full ideology behind it. They will focus on the fact that they are now making lower payments on their house. My mother was one of those people. She went out and got a fixed rate interest only loan without asking me. She did not do the full research behind this type of loan, which she should have because it was a big decision. When you are deciding on a multiple hundred thousand dollar transaction (your house), do not take it lightly. She came to me a few days after signing it and told me what she innocently did. She had an interest only loan with an interest rate that was not bad, but it was not the best. She obviously paid origination fees and all the others fees associated with a refinance. She did not necessarily think of the loan in regards to how it works. She thought of it from the point of view, is it affordable. Well, I told her that all of her payments she will make will not pay down the loan. Not one penny. So if you had a $300,000 interest only loan, the payments you make will not take down the loan principal. You can go for 5 years making payments, but your loan amount will still stay at $300,000 the entire time. Now that sounds bad, but you can pay down the loan during this time. In order to pay down the loan you need to make more than the minimum payment, which is the interest only payment. This type of mortgage can be good if you are able to afford it. I would suggest not getting this loan because you are tight on money. You will spend more money in the long run if you are only able to make the interest only payments and cannot pay down the principal.

Now I am going to talk about the good side of this loan. If you are in a position where you are not getting this loan because you are tight on money, but you would like to have more control of your money, it can be a good loan. This loan can give you the option of controlling your cash flow. You can allocate your money to different needs each month if you prefer. You can also make more than the interest only payment so the principal is paid down. The thing to remember is this loan is for people who are thinking of ways to control the flow of their money, not looking to reduce their bills. For an exaggerated example, person "A" is currently paying $3,000 a month on the mortgage bill. If that person got an interest only loan, the payment would be $2,500, and the payment would only pay against interest. This person only got the loan in order to have more options each month with the flow of money, but this person still makes a $3,000 payment each month. Now, when an emergency or unanticipated event happens, this person can take advantage of the interest only loan by making an interest only payment of $2,500. That leaves $500 for this person to use on the unexpected expense.

That was one of the many beneficial ways to use an interest only loan.