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 benefit 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 favorable 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 usually offered with an adjustable rate
mortgage (ARM) this means the interest rate is not fixed and may vary 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
includes 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 dillema 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.
This work is protected under copyright and may not be published in other works without express written permission
Return to Brokerforyou's real estate articles