Interest Only Refinance Loan

An Interest Only Refinance Loan can be an effective means by which to minimize or even eliminate high interest credit and charge card debt and possibly pay less than half the interest rate the borrower is presently having to find.

Even with more regular personal loans attracting lower interest rates, refinancing an existing home loan to an interest only option may have distinct advantages.

If a borrower has a 30 year term mortgage it may be that the first 5 or 10 years would be for interest only payments. The principal may be reduced by further payments but it is not necessary.

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After the interest only period is finished, the portion of the principal outstanding would be amortized for the remaining period of 20 years. Obviously the initial attraction of the interest only loan is that the early repayments are substantially less.

It is usually around this time that people wish to look at an Interest Only Refinance Loan which basically delays the principal repayments allowing the borrower to continue with the lower cost of paying only the interest. There is a risk involved here in that interest rates may increase and the market value of the home may decline leaving an unhealthy financial situation for the homeowner.

An Interest Only Refinance Loan is often a good option for people who are expecting substantial capital gains in the short term or who are likely to sell their house during the interest only period. As long as the economy is stable and the trend for property is increasing interest only refinancing is a good choice, especially for people who have irregular incomes.

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Interest Only Refinance Loans are considered a higher lending risk and will usually attract a slightly higher interest rate. A borrower must be aware that it is very easy to take on too much risk, especially if they are presently unable to qualify for a more traditional home loan.

Danger signals are often no deposit, interest only loans with no intention to reduce the principal during the interest only period. As mentioned, this may be part of a strategy but if it's just to have low monthly payments and hope things get better later then it is wise to keep informed and have an exit plan should anything happen in the future.

A situation could occur where the lender is unable to pay the increased monthly amortized payments when the interest free period ends, is not able to refinance due to lack of equity in the home and if the housing market is severely depressed they be unable to sell the home or be forced into foreclosure.

The thing is to just be aware that Interest Only Refinancing Loans can be relatively cheap and a great financial option but it has to be understood that they can also be full of pitfalls for the unwary.

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