Refinance Home Mortgage

In the past few years a popular trend among home buyers is to opt for the interest only mortgage loan. This loan differs from the traditional thirty-year mortgage by allowing the buyer to pay only the interest for the first years of the loan. The result is often significantly lower monthly payments, anywhere from $200-500 dollars per month. However, buyers should fully understand the terms of these attractive loans before investing.

The interest only mortgage option is often used with an 80/20 mortgage loan. The 80/20 mortgage loan is actually two loans; one for 80% of the homes value and the other is for the remaining 20%. The interest only option is usually on the 80% loan, but can be used on both loans. Typical interest only mortgage options allow the buyer to pay only the interest for the first 3-5 years, forgoing payments to the principle during this time. The lower monthly payments allows a buyer to afford a higher priced home that what would be available to them through a traditional thirty-year mortgage loan.

Savvy investors may opt for the interest only option on a home below their maximum affordable rate and invest the savings. After the interest only period has expired the buyer typically refinances the mortgage loan. Since no payments were made on the principle during the interest only period, the full principle needs to be refinanced. If the value of the home has increased since the date of purchase, the buyer can use this equity to negotiate lower interest rates. However, some risk with the interest only loan is if the value of your home stays flat or decreases. This can leave the buyer in an unfavorable position when refinancing. The interest only mortgage loan option can also be used on the thirty-year mortgage loan, or the less popular 70/30 mortgage loan. However, these loans generally require the buyer to pass more stringent credit approvals than the 80/20 mortgage loan.

The interest only mortgage loan has many advantages that buyers should seriously consider. The lower monthly payments allow buyers to afford higher priced homes or invest the savings. Buyers should carefully investigate their home of interest and the surrounding community to avoid an unfavorable position when it comes time to refinance.

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