The biggest risk when refinancing your mortgage with an interest only mortgage is that you never pay down the principle balance on your loan. Many homeowners fall for the trap of interest-only mortgages because they are easier to qualify; however, if you don’t get in the habit of paying additional loan principle each month, you’ll never get anywhere paying off your loan.
You can easily calculate what your mortgage payment will be with an interest only mortgage. Simply multiply your interest rate by the loan amount and divide by 12 months. Suppose your mortgage rate is 6.0% percent on a $250,000 loan. Multiply 6.0 percent by $250,000 (.06 x $250,000 = 15,000) and divide by 12 months. Your payment amount in this example is $1,250 each month. Compared to a fully amortized, 30 year fixed rate mortgage at $1,498 per month, and you can see why interest-only mortgages are so attractive for many homeowners.
Many homeowners fail to realize that the interest-only period only lasts for a fixed-period of time, often five years. When the interest-only period ends, your mortgage lender will convert the loan to a standard Adjustable Rate Mortgage with payments fully amortized for the time remaining in your loan contract. In plain English, this means your payment amount will go significantly and if you are unprepared to make these payments you risk losing your home.
You can learn more about your mortgage refinancing options, including expensive homeowners mistakes that you need to avoid with our free, six part mortgage tutorial.