Interest Only Refinancing Loan

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Interest Only Loan Refinancing: What are the Risks?

Over the last few years, interest-only refinancing loans have gained popularity. Many first-time homeowners face unexpected financial burdens and many people looking to move into homes of greater value are confronting skyrocketing prices across parts of the county. For many borrowers, the prospects of paying only interest now and leaving the principal for later can free up cash when they need it most.

If you're looking for a "starter home" or a so-called "fixer upper", the lower monthly payments of the interest-only loan can mean up to 20% more home for the money. Although you make no progress against the principal, with an interest-only loan you've bought yourself time to advance in your career or improve your earning power through education, marriage, or other factors.

Interest-only refinancing may be the best way for you to free up cash for the short-term -- say for other investments or to flip a property -- and is very attractive to homeowners who are looking for quick capital gains.

Beware of Balloon Payments and Surging Interest Rates

It's not always a perfect picture when you commit to an interest-only loan. If you began your mortgage with locked-in, fixed interest rate over the interest-only period, there may be more stability. But if the interest rate falls, you won't receive the benefits. At the end of the fixed-period of any interest-only loan (typically between five and ten years), the homeowner has to deal with the inevitable: you have to face the principal.

If your financial well-being hasn't improved, this so-called balloon payment can impose a staggering burden. Many people find themselves at this point in the mortgage all too soon. They may have to consider additional refinancing options. If so, you may have lost all the payments you made into interest as you refinance the principal anew.
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