Should I refinance an interest-only loan if my payment increases?

November 07th, 2011

To maximize their buying power, home buyers have used the leverage of interest-only mortgages, which offer lower payments than fully-amortizing home loans. Eventually, however, the principal balance has to be repaid. When the principal repayment period begins, mortgage payments can increase sharply.

If you currently have an interest-only mortgage, use a free mortgage calculator to evaluate the long-term benefits of mortgage refinancing at today's low mortgage rates.

Why refinance?

So why should you consider refinancing your mortgage? Because after your interest-only payment period ends, your monthly payment will increase significantly. You'd have to repay the principal balance over a shorter period. If your interest-only period was five years, for example, you'll have only 25 years to repay the loan. It it's ten years, you have only 20 years to repay the full balance. You might be better off refinancing to a fully-amortizing loan with a new 30-year term.

Let's evaluate the following scenario, as an example, using a free mortgage payment calculator:

  • $300,000 mortgage taken five years ago.
  • 5.5% fixed rate for 30 years
  • Interest-only payments of $1,375 per month for first 10 years
  • Balance due still $300,000 due to interest-only payments

You could go on making the $1,375 payment for another five years--if you can afford it. The payment for a fully-amortizing loan with a 20-year term is $2,064!

Taking Action

Refinancing your home mortgage now means your payments may not drop even if you get a lower mortgage rate. If you refinanced the $300,000 to 5% (.5% lower than your current rate), your fully-amortized payment would increase to $1,610. However, you'd avert a sharp payment increase (and by then rates may be much higher than they are now) and increase your home equity.

If you are in this position, use a free mortgage calculator available on this site to evaluate how your payment may change once your interest-only period ends, the long term benefits of fixing your rate at today's low mortgage rate, and the total savings you may see over the life of your mortgage.

Posted By :

Dennis is co-owner and broker of record for Stratis Financial in Southern California. With over twenty years experience in the mortgage industry he has helped homeowners save millions of dollars refinancing their homes. His Weekly Rate and Market Update keeps his clients and real estate professionals educated and informed on the mortgage industry and the economy. Dennis has a degree in Economics and Political Studies from Pitzer College and is married with two children.

Housing conditions shift in favor of refinancing

September 12th, 2012

With all the attention given to low mortgage rates in the past couple years, it can be easy to forget about the other key variable in home affordability -- h...  Read More

Homeowners search for solutions after write-down program is scrapped.

August 20th, 2012

The U.S. government wants Fannie Mae and Freddie Mac to write down mortgages to help troubled borrowers and spur the housing market to recovery. It is estima...  Read More

Should you relocate if you still have a mortgage?

August 15th, 2012

Trying to find employment in this economy can be challenging. Moving to a new city or state could open up new job possibilities. But what if you have a house...  Read More

When rates change rapidly, reach for a refinancing calculator

July 26th, 2012

Another new low in mortgage rates is creating opportunities for home buyers and homeowners alike. Today's rapidly changing rates have also made mortgage calc...  Read More

0 Responses to "Should I refinance an interest-only loan if my payment increases?"

No Comments

Leave a Comment