Category Archives: Home Mortgage
Interest Only Loan Rate
Interest only (IO) loans are loans that provide the option to pay just the interest on a loan for an initial period of repayment, say 5 years or 10 years. It also gives the choice of paying the interest plus as much principal as you want. The main advantage of this loan is the low interest you pay each month even though the interest rate is the same as that on conventional loans. IO loans also help to control the monthly payment and cash flow each month. After the initial period, the repayments are raised to fully amortized levels. These loans allow for a large principle prepayment if desired.
Interest only loans can be fixed-rate mortgages (FRM) or adjustable-rate mortgages (ARM). Though it is generally felt that interest only loans have lower interest rates, this is not true. In fact, they may have higher rates, because the risk is greater in IO loans. While going for an interest only loan with adjustable rates, it is very important to consider what the future interest rates are likely to be. This is because repayment in the future will consist of both interest as well as the principle.
For interest only loans based on the adjustable mortgage rates, the interest rate is calculated and changed based on the index rate. The Index rate depends on the average of Interbank offered rates for one year US dollar –denominated deposits in the LIBOR (London Interbank Offered Rate). This Index is published in the Wall Street Journal. The interest rate is adjusted according to the index plus the margin (rounded to the nearest 1/8 percentage point). The interest rate cannot change by more than 5.00 percentage points than the initial interest rate over the whole term of the loan. Similarly, it cannot decrease less than the margin on the loan. Interest only loan products can be 30, 20, 15 or 10 year fixed mortgage with varying adjustable rates.
With increasing real estate prices, interest-only loans are becoming a preferred option for many. There are also many lending companies that are giving attractive options on interest-only loans. Information about interest-only loans is available on the Internet. They also contain easy-to-use interest only calculators that tell you the kind of repayments you will have to make. The current interest rates on interest only loans are also available on the Internet.
Interest Only Loan Refinance
Refinancing of interest only loans simply means swapping one loan for another. It is an effective way to decrease the debt on existing loans. This is especially beneficial if the current interest rates are lower than the interest rates you are presently paying on the loan. Refinancing would enable you to convert your high interest debt into a low interest debt, as the amount of monthly payment would decrease. The extra money saved can be reinvested in something more lucrative like real estate or shares, or to pay off high-interest debts like credit cards. Refinancing is also done for converting an adjustable rate mortgage into a fixed rate mortgage. Refinancing has become so common in recent years that almost three quarters of new mortgages were refinanced loans in 2003.
Refinancing of interest only loans is very attractive, especially when the time comes for the loan to get amortized. That means the loan will have to be repaid at the current interest rate, along with the principle. Most people seek to refinance their interest only loan in order to buy more time, i.e. to delay the repayment of the principle further. However, this may also increase the risk on the loan, since the interest rates may go up further, the price of the house may come down or the economy may slump in the future.
Refinancing of interest only loans is ideal for people who are expecting huge capital gains in the next few years or are planning to sell their house by the time the interest-only period is over. This is a good alternative as long as the economy is good, the interest rates are steady and the prices of houses are increasing. Interest only refinancing is recommended for people who have irregular incomes like commissions or bonuses or those who are expecting a hike in their income in the coming years. The savings accrued from refinancing can also be used for home improvement, which will increase the value of the home in the future.
A few questions to be considered while refinancing are: how long do you expect to stay in the house? How much equity do you have in the house? Will you have to pay points for getting a low rate from the refinance? What would be the closing costs? Will the lower payments from the refinance enable you to cover the closing costs, points (if any) and the fees reasonably?
There are several lenders who are offering refinance options for interest only loans. The Internet is a good source for getting information about these offers and also to find out more about interest only loan refinance.