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Refinancing with interest-only mortgages

Interest-only mortgages are a relatively new phenomenon in the refinancing industry and the home buying industry. While the attraction of an interest-only mortgage is usually more monthly cash flow, this increased cash flow can come with a significant price tag. In exchange for more monthly cash flow, homeowners may sacrifice the ability to obtain a fixed-rate mortgage, as well as the ability to build equity. This article will examine these features further to provide readers with more information about interest-only mortgages.

Greater monthly cash flow

For many homeowners, a major advantage of an interest-only mortgage is the ability to increase monthly cash flow. Homeowners who refinance by taking advantage of an interest-only mortgage may have more money available each month because they initially only have to pay interest on the mortgage. The reduction in principal payments can make it easier for homeowners to afford a larger home or to have the ability to live more lavishly within their budget. However, these types of refinancing options often come at a significant cost.

While interest-only loans may not be ideal, they can be beneficial in situations where homeowners are having great difficulty meeting their monthly obligations. In such cases, homeowners may be willing to sacrifice overall financial losses in exchange for the ability to continue paying their monthly bills in a timely manner.

The Unknown Risks of an ARM

Interest-only refinance loans typically offer adjustable rate mortgages (ARMs), which means that interest rates are not fixed and may fluctuate as major indices rise and fall. This risk can be quite costly to homeowners if interest rates rise significantly. There is usually a cap, in percentage terms, on how much interest rates can rise over a certain period of time, but this can still be a very expensive mistake for homeowners.

In some cases, an ARM refinance option with an interest-only component may be worthwhile. For example, if a homeowner has a hybrid mortgage that features a fixed rate on the interest-only portion of the loan and an ARM on the principal and interest portion of the loan, they may benefit from this situation if they do not intend to stay in the home longer than the interest-only period. This period may vary depending on the lender and circumstances. Homeowners who plan to sell their home before the end of the interest-only period and the beginning of the ARM period may benefit from the security of lower monthly payments and a fixed interest rate before they have to worry about paying back the principal or dealing with a different interest rate.

No equity in the home

Another disadvantage of interest-only refinance loans is that they do not allow homeowners to build equity in their homes during the initial phase of interest-only loan repayments. This can be a problem for homeowners who wish to profit from the sale of their home. These homeowners may find that participating in an interest-only refinance has a devastating effect on the profit they are able to make from reselling their home.