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Interest Only Refinancing And Its Benefits

Aug 17, 2007
An interest-only loan gives you the option of paying just the interest, or paying interest and as much principal as you want in any given month.

A lot of refinance options are available for loans that are interest-only for the first 10 years. If you are thinking of refinancing a home loan with an interest only option, there are a few things to consider before you come to a decision on this kind of loan. There is no such thing as an interest only mortgage.

Finally you have to pay the loan principle also. However this method is also popular depending on your situation. The interest only option is available in the initial years of the loan for a fixed number of years. After the interest only period, all payments include principal and interest. Interest-only loans can be either traditional fixed rate or adjustable rate mortgages.

The interest only option for refinancing a mortgage has advantages as well as drawbacks. By not paying the principle now means you will have to pay it later. On a mortgage it has been the standard in the past that most of your payment would go towards the interest, but with the low interest rates now this changes the factor.

Refinancing from a traditional home loan to an interest-only loan give you a smart way to control your cash flow. It gives you a flexible way to manage your personal finances. If you choose to make the interest only payment one month, that payment is lower than it would be had you made the principal and interest payment. Your interest rate may or may not be lower than a traditional mortgage, but you will have the option of choosing your payment.
Lets illustrate the payment flexibility of refinancing a $200,000 loan at a 5.75% interest
$200K @ 5.75% Interest Only Payment $745.00
$200K @ 5.75% Principal and Interest Payment $1,050.00
Cash flow difference is $305.00 a month.

So in months, when your pocket does not allow much cash outflow, you do not need to principal and interest. You can just pay the interest.
Now, suppose you want added benefit to this. Say, you want to make interest only payments and put the difference into an investment that brings higher yield. There is no such option available traditionally.

Now, refinancing to an interest only loan is a new and good choice for anyone looking to make their money work for them. The savings or lower monthly installments here increases your cash in hand that can be used to:

1)Pay down immediate debts.

2)Buying vehicles

3)Your children's fees

4)Renovation of your home.

5)Putting money in a better investment

Refinancing depends on your existing loan balance. Refinancing to an interest only loan could get you access to a lot of money over the term of several years to put to use as you think best.

Interest only refinancing may also be a good option for people who expect move again before the end of the interest only period of their home loan.

A myth about interest only mortgage refinancing is that if you are not paying principal amount every month, you are not building home equity. This is not the case always as homes in the U.S. have been appreciating between five and six percent a year. Chances are that even if you are not paying down principal, appreciation is building equity in your home for you.
About the Author
Refinance is a key part of business development strategy used by Nazir on a daily basis. Proper use of this financial instrument depends very much on the quality of information upon which any refinancing decisions are based. For your better decisions, visit refinance now at http://www.123refinancenow.com
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