Refinance Interests Only Loan – Taking Advantage of Lower Rates
If you’ve purchased a home in the last ten years, there is a good chance that you might have financed the mortgage with an interest only home loan. This means that instead of having to make a monthly payment that was applied to both interest and the principle amount of the loan, you have only made payments toward interest. In general, this type of a loan is used when the borrower wants to have a little more flexibility within the first few years of their loan. However, after the first few years, most of these loans experience a significant increase in interest. If you want to avoid making these higher payments, you might consider the option to refinance interests only loan.
Many people find it necessary to refinance interests only loan in the months or weeks before the rate is about to change on their mortgage. When you’ve been making the much lower interest payments for four or five years, it can be a rude awakening to realize that your monthly payment is about to double or even triple. Although the larger payment will mean that you’re finally going to start paying down the principle amount of the loan, it can add a lot of financial stress.
When mortgage professionals talk about the process to refinance interests only loan, they are talking about simply swapping one loan rate out for another. This essentially means that you will take out a new mortgage at a lower interest rate, pay off the balance of your old loan, and then start paying regular mortgage payments on the new loan instead. If you have an interest only loan that involved an introductory period followed by a higher fixed loan rate, you’ll want to start talking to a lender about refinancing during the last year of your flexible loan terms.
It’s important to note that depending on the state of the economy, it can be somewhat difficult to refinance interests only loan terms with your bank. If the interest rates have risen up over your fixed terms by the time you’re ready to refinance, there are little to no advantages to going through the refinancing process. However, if the housing market is such that the interest rates on fixed loans have dropped significantly while you’ve been making interest only payments, there are great advantages to refinancing your home within this time period. Make sure you talk with a trusted financial advisor so that you know the challenges of which ever route you take.
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