Interest Only Loan Refinance

2009-07-26T09:40:00.000-07:00

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.

Home Refinance Options Guide

2009-07-25T14:12:00.000-07:00

Refinancing your Home is a very big decision to make. You should think of your home refinance options before you settle on your decision. Some people are thinking about refinancing their home for what is left on the mortgage, and they are doing so because they want to lower the interest rate on the house. Other people are thinking about refinancing their home because they want to take extra money out from the value of the house. The main reason people refinance and take some money out of the equity is because they want to spend the money on home improvements, cars, boats, college, real estate, and many more.

Before the whole mortgage crisis took place, I worked for a mortgage company. I will not name it, but I will say that the people in that company believed they actually helped people. In essence, you could think that. But when you dig deep into the details of what the people are paying when they did a home refinance, it changes the perception. I worked there in 2004, and I only worked for 2 months before I quit. It might have actually only been 6 weeks. My memory is slightly foggy. Anyway, I left because I thought it was garbage how people got into loans and did not know 100% what they were doing. I will say that I believe there is fault on both sides of the parties for the mortgage crisis. I'm sorry to say, as some people might not agree with that. But I believe it is the responsibility of the person getting a mortgage to read and understand the fine print. That is why I am here to help teach people what actually happens in a mortgage or a home refinance. A home refinance can also be called an equity line of credit. I'll go over a broad example of what happens when you get a home refinance to pull money out in order to buy something. Keep reading for good information.

It is very smart if you are refinancing your house to get a lower interest rate. If you are doing a home refinance to take money out from your home's equity to spend on something like a car, you might want to think it through before you decide.

Doing a home refinance can be a very good tool, only if you know what you are doing. You should learn what all the terms and conditions are in a mortgage contract before you sign anything. Another thing to keep in mind is the actual interest you will pay on your refinanced mortgage if you take money out to buy a car or something.

Lets go over an example:

The increase of your monthly mortgage payment will be tempting if you look at it thinking your payment won't go up a lot if you use the money to buy a car. Say for instance you are going to buy a car with money you pull out of your home's equity. Your current outstanding principal for the mortgage is $300,000, and your interest rate is 5%. The current payment for the mortgage is $1,600. Your home is valued at $500,000, and you want to take out $30,000 to buy a car. Your new mortgage payment will be $1,770, which is only $170 more than your old payment. Now, this does not sound like a bad deal does it?

Lets go over what exactly this includes when you buy a car using your home's equity. We took out $30,000 from the homes equity to pay for a car. The mortgage was refinanced at $330,000 with a 5% interest rate. Over 30 years of paying your mortgage, you would paid a total of $28,000 just from interest alone. That means that the car actually cost $58,000, which is almost double of what the value is.

Some people might decide to change their mind when they discover this fact. Although that is a scary number when you see it written out, you can still use your home's equity and not pay all that interest. In order to avoid the interest, you would need to make extra payments on your mortgage. Doing so will decrease the amount of principal on your refinanced mortgage loan. It also decreases the time your home loan will be paid off.

I bet you're glad you ran into this home refinance options guide now that you have seen some of these numbers. Another thing people run into when they are talking with a loan officer, is the loan officer will suggest consolidating all of your bills into your mortgage.

Now, what is the "good" thing about refinancing your home mortgage and consolidating all of your bills like credit cards with it? Well, your monthly payment for all your bills will go down. You will only have to pay one bill instead of 3, 5, or however different many bills you have. Now lets think of the horrible downside. When you consolidate all of your bills onto your mortgage, you are now paying those bills over 30 years. Although you are paying a 5% interest rate, the amount of interest you have paid in 30 years is a lot. You can refer to the example of pulling out equity money to buy that car. Not only do you pay the interest on that, but you are also paying origination fees and all the other fees that are associated with a home refinance.

Even though I have said the negative points of refinancing to purchase things with your home's equity, it does not hurt to think of all the home refinance options you have. You could use the money from your home's equity to invest in a business or real estate. If planned correctly, you can use this money to earn more money and offset the interest you will pay. Maybe if your business idea turns out well, it might even start making the mortgage payments for you.

There are a lot of reasons a person might decide to look at their home refinance options. Some people might refinance the mortgage on their house to lower the interest rate, which in turn lowers the payment. Other people will refinance their house to take money out from the equity they have. There is a lot of different types of mortgages, and you should know how each one you are considering works. One misunderstanding or important fact that slips past you can cost you tens of thousands of dollars in the long term and possibly in the long term.

Keep reading this blog to get free information on your refinancing options, and you can learn some of the important facts that can save you thousands of dollars when you refinance your house.