Any standard mortgage consists of two types of payments. One is the interest on the money borrowed, and the other is to repay the principal. An interest-only mortgage or mortgage refinance loan provides the buyer with the option to pay only the interest part of the payment for a specific period of the loan.
The interest-only mortgage refinance or loan will typically last for a period of five to seven years of the loan’s term. In some cases, the homeowner will then make a lump sum payment to pay down some of the principal that has remained unpaid, or they may choose to make additional payments (if possible) throughout the initial interest-only part of the refinance loan.
When to Consider the Option
For buyers that qualify, an interest-only mortgage refinance is a great option to take advantage of low payments if the home is to be sold within that five-to-seven-year window.
This allows the homeowner to avoid paying the principal and use that money for home upgrades or even to save for a down payment on the next home. Since the home is going to be resold, there is no need to make large payments on the principal as this may be counterintuitive to what is required to make a new home purchase.
When interest rates drop, choosing an interest-only mortgage refinance for the maximum allowable time period can also help you to lower monthly costs to address other costs and expenses. Of course, homeowners can also put additional payments towards the principal, but this can be more flexible and on a less structured plan.
To discuss the benefits of an interest-only mortgage refinance and if it is right for you, talk to the experts at Guaranteed Rate.
