Tag Archives: interest only

Interest Only Refinance and What It Means

January 24, 2020   Loan Tips

The various reasons homeowners prefer refinancing include taking advantage of lower interest rates, low monthly payments, getting different types of advances and to building equity. In this type of refinancing, the first 7 to 10 years of any 30 year loan only has payments required on the interest. There is no requirement of paying of the principal amount until you reach the point where it is mandatory to pay it. A good credit history will help you lower your rates of interest.

Interest only refinance loans were introduced in early 1900s, but the concept suffered a set back when the American stock market crashed in 1929. They have returned and appeal to investors, entrepreneurs and self-employed people who are short of credit. They have become very popular in the public and the private sector due to their feature of only paying the interest amount. Many people who want to increase the value of their house have opted for these loans. This type of loan, even if it does not offer very low interest rates, provides reduced monthly payments for the first 5, 7 or 10 years.

Deciding on Interest Only Refinance

Customers who do not intend to stay in a house for long, who have elastic incomes and those who invest in real estate are suited to this kind of loan. People earning from bonuses and incentives, businessmen and self employment who need payments for lean months benefit from these kinds of loans. Benefits of Interest Only Refinance

This type of loan is useful when you need to lower your payments for a specific time period. The following are the advantages of interest only refinance:

* Tax Benefits – the principal remains fixed which allows you to have a greater amount of tax deductible interest.

* Gives you Ability to Invest – returns a better interest rate than the one on simple advance.

* You have Various Choices – a simple loan cannot provide you the option of paying the principal amount when your business is earning profits, but with interest only refinance you can benefit by paying only the interest when business is slow and paying the principal when income is high.

* Paying Debt – You can save thousands of dollars by utilizing the extra cash every month, which can be used for investing in fruitful purposes.

* Future Expectations – If you think of using interest only refinance for 10 years, it will be highly beneficial as you can avoid payment of principal amount.

Disadvantage of Interest Only Refinance

The only disadvantage is that once the principal payment period starts, the payments may pile up causing difficulties in repayment. You need to carefully evaluate as to whether you will be able to handle the ballooning payments of 7 to 10 years. You might require help of a mortgage professional who will advise you how to make moves with interest only refinance.

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Interest Only Loan Rate

June 10, 2019   Home Mortgage

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.

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