Interest only mortgage loans are as their name implies loans where the payment is based only on the interest due for a given month. This type of loan has payments that are interest only for a specified period of time, typically five to ten years. At the end of the interest only period your loan will be converted to a standard Adjustable Rate Mortgage with payments based on the remaining term length.
The catch with an interest only mortgage is that when you make interest only payments you are not paying down the balance of your mortgage. When your loan is converted to a standard Adjustable Rate Mortgage your payment will be based on the full amount you borrowed and the time remaining in your loan.
Suppose for example, that you’ve borrowed $100,000 with a 30 year interest only mortgage at 6.25 percent. Your payment for this loan will be approximately $520. Had you financed your home with a traditional, fully amortized loan the payment would be approximately $615. The difference between the lower, interest only payment and the fully amortized payment is the amount applied to your loan balance. In this example, 95 dollars paid towards the loan balance with the traditional mortgage.
Who Should Consider Interest Only Mortgage Refinancing?
Interest only mortgage loans are ideal for homeowners that require the lowest payment amount possible for a short period of time. Because interest only mortgages have significantly more risk than a traditional loan, you can minimize your risks by paying more than the required payment amount when able. Many homeowners get into trouble with interest only mortgages because they purchase more home than they could actually afford.
What Are The Dangers of Interest Only Mortgage Refinancing?
The biggest danger of refinancing your mortgage with an interest only mortgage is accepting a loan you will not be able to afford when the interest only period ends. If you are unable to refinance when happens, you could lose your home to foreclosure. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free mortgage toolkit. You can access the toolkit by clicking the DVD image at the top of this page.