Re Financing With An Interest Only Mortgage

Re-Financing with an​ Interest Only Mortgage
Interest only mortgages are a​ relatively 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 main advantage 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 ideal,​ 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 typically offered with an​ adjustable rate mortgage (ARM) this means the​ interest rate is​ not fixed and may fluctuate 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 worthwhile in​ some situations .​
For example if​ the​ homeowner has a​ hybrid mortgage which features 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 allow 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​ problem 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 .​

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