Mortgage Refinancing With An Interest Only Loan Not A Good Option For All |
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Refinancing with an interest-only loan may
prove beneficial when income is mainly from irregular commission and bonus
checks. Not that commission and bonus are bad, so long as they continue. For a person expecting to make much more money in the next few years, mortgage refinancing on the basis of potential earning power makes a risky prospect. With today's market being volatile putting your home on the line is too great a risk. In contemplating mortgage refinancing with an interest-only loan, you are at interest rate risk. Take the example of refinancing a $100,000 interest-only loan with a 6% interest rate. The average monthly payment would be around $600 with $500 in interest. Therefore paying only the interest saves you no more than $100 every month. It may seem like a good prospect at this point. However by mortgage refinancing if you fail to pay on the principal amount every month, by the end of your interest-only period, you'll be paying addition al interest on the original amount borrowed. With the figures worked out on mortgage refinancing on an interest-only loan, you may be taken aback at the jumbled confusion. Refrain from jumping on to the mortgage refinancing on interest-only loan bandwagon, be aware of the possibilities. Consequently, you end up paying more than with mortgage refinancing with an interest-only loan options along the more conventional lines. Once risks are considered and evaluated, making a decision on mortgage refinancing with an interest-only loan can be easier. It isn't surprising that financial advisors often disagree over those who should and should not avail an interest-only mortgage when considering mortgage refinancing. But the common consensus that refinancing with an interest-only mortgage is not too beneficial for those with a steady income minus fluctuations. With your salary being consistently the same, having to adjust to higher payments at the end of the interest-only period can prove unsettling. Mortgage refinancing is not good for those people who will not properly invest the savings during the interest only payment period. Almost everyone has really good intentions, but few of us actually follow through with our investment plan. Remember when you bought that overpriced treadmill, promising yourself you'd stick to your plan of walking at least five miles every day? Well, when that plan failed, the outcome was the still slightly larger than we would like thighs, and one more thing to collect dust in the corner. But, if you choose mortgage refinancing with interest-only loan, planning to invest the savings and you don't, when that plan fails you will face the possibility of losing your home. Remember, if your plan to invest fails, you, your slightly-larger-than-you-would-like-thighs and your overpriced-dust-collecting-treadmill will all be on the street. But hey, you can always use the treadmill to stay warm! A mortgage refinancing with interest-only loan will often offer low interest rates for typically the first five years. During that time, the borrower will pay only for the interest on the home mortgage. The result is lower monthly payments than a traditional mortgage refinancing. On completion of the interest-only period, the loan becomes a fully amortized 30-year mortgage, minus the interest-only period - so it's basically repaid at the 25-year amortization schedule. Many times, borrowers that have chosen this option for mortgage refinancing will take advantage of the initially low payments, and then sell the home or consider mortgage refinancing again to avoid the larger payments after the loan converts. But, possible disadvantages of an interest-only loan for refinancing loom near. The main disadvantage of mortgage refinancing with an interest-only loan is that after the interest-only portion, interest rates will fluctuate. Remember, after the interest-only period, you will begin paying back the principal amount, which still accumulates interest. So if in the five-year interest-only period, the interest rate skyrockets, you will face even larger payments than you may have expected. |
