Interest Only Refinance

An interest only mortgage refinance is basically exactly what it states. It is a mortgage loan in which the borrower pays only the interest on the loan and nothing on the principle. The borrower does have the option to pay some on the principle but it is not required.

Although an interest only mortgage is usually used to purchase a home which the borrower might not normally qualify for financially, there are some occasions when refinancing into an interest only mortgage would be beneficial. Needing more disposable income or to pay off some existing debts would be a couple reasons to take on an interest only mortgage.

There are several advantages to getting an interest only refinance mortgage. First the payments are considerably lower and also you qualify for a higher loan amount. One good reason would be to maximize your tax deduction for your home.

There are a few disadvantages to an interest only mortgage. One disadvantage is that interest only mortgages are for short term (usually only 5 years) and even though the interest is fixed over that time period at the end of that period the rate adjusts to the current rate plus the margin for the interest only loan. This can drastically change the current payment.

Since interest only mortgages usually mean a sizably higher risk to the lender interest rates on these loans are generally higher. Also, the homeowner runs a significant risk of losing his investment if the housing market takes a down turn. Since there is no equity being built through principle payments, refinancing or selling the home might be difficult if the homeowner realizes he can't make the higher fully amortized payments after the short-term interest free loan expires.

The interest free mortgage can be a good instrument for those people wanting to get into a better, more expensive home immediately. For the most part though, buying a home you can afford now and then a few years later selling it and using the equity to upgrade still makes more sense.