Financing article blog

Borrowers are refinancing their homes in droves. While this practice can offer many benefits for homeowners, knowing what to expect can help you decide if it’s right for you.

Interest rates are rising. Should you lock in a low rate now, or would refinancing be a huge mistake? Unfortunately, the arguments for and against refinancing don’t provide a one-size-fits-all solution. Use the following list to help you decide if refinancing is best for you.

1. Lower interest rates

Many borrowers refinance their homes when interest rates are low. If you’re paying 10 percent, paying 6 percent certainly sounds better. But refinancing isn’t free. Make sure that your closing costs don’t negate the amount of money that you’ll save.

If your credit has improved since you purchased your home, your new rate may reflect that. But the opposite is also true. If your credit has suffered, now may not be the best time to refinance. If a lender or mortgage broker reviews your credit, their inquiries can negatively affect your credit score. Only pursue this option if you’re in dire straits and need to reduce your payments in order to stay afloat.

2. Greater investment return.

If you’re spending all of your hard-earned cash on your house payment, you could be missing out on a prime investment market. Consider refinancing in order to reduce your monthly outlay. Then, invest the extra funds into a diverse investment portfolio. You’ll be able to keep your house and invest in your long-term goals simultaneously.

3. Debt reduction.

Use the equity that you’ve accumulated to do a cash-out refinance. You’ll receive a lump sum payment that you can use to reduce or pay off debt. If you have a large amount of high-interest credit card debt, you could save thousands of dollars this way. Unlike a home equity loan that lenders simply add to your existing mortgage, a cash-out refinancing loan will totally replace it. But don’t forget that you’ll be using one form of debt to substitute for another. You’ll also need to avoid the temptation to use that extra cash for frivolous expenses.

4. New repayment period.

Refinancing resets your mortgage clock. A longer term may significantly reduce your monthly payment amount. It will also increase the amount of interest that you’ll pay over the life of the loan, so think carefully before pursuing this option.

5. Lower monthly payments.

Most homeowners refinance to lower their monthly payments on a fixed- or adjustable-rate mortgage (ARM) with a high interest rate. Lenders generally issue ARMs with low initial fixed “teaser” rates, but they often dramatically increase once they convert to an adjustable rate, usually after one to five years.

Refinancing your home can be a rewarding endeavor. Lower monthly payments, extended loan terms, debt reduction, and reduced interest rates all provide powerful incentives. But refinancing does not benefit all borrowers, and can be quite costly. Consider all the options to make sure that refinancing is truly right for you.

Refinancing of interest only loans simply means swapping one loan for another. It is an effective way to decrease the debt on existing loans. This is especially beneficial if the current interest rates are lower than the interest rates you are presently paying on the loan. Refinancing would enable you to convert your high interest debt into a low interest debt, as the amount of monthly payment would decrease. The extra money saved can be reinvested in something more lucrative like real estate or shares, or to pay off high-interest debts like credit cards. Refinancing is also done for converting an adjustable rate mortgage into a fixed rate mortgage. Refinancing has become so common in recent years that almost three quarters of new mortgages were refinanced loans in 2003.

Refinancing of interest only loans is very attractive, especially when the time comes for the loan to get amortized. That means the loan will have to be repaid at the current interest rate, along with the principle. Most people seek to refinance their interest only loan in order to buy more time, i.e. to delay the repayment of the principle further. However, this may also increase the risk on the loan, since the interest rates may go up further, the price of the house may come down or the economy may slump in the future.

Refinancing of interest only loans is ideal for people who are expecting huge capital gains in the next few years or are planning to sell their house by the time the interest-only period is over. This is a good alternative as long as the economy is good, the interest rates are steady and the prices of houses are increasing. Interest only refinancing is recommended for people who have irregular incomes like commissions or bonuses or those who are expecting a hike in their income in the coming years. The savings accrued from refinancing can also be used for home improvement, which will increase the value of the home in the future.

A few questions to be considered while refinancing are: how long do you expect to stay in the house? How much equity do you have in the house? Will you have to pay points for getting a low rate from the refinance? What would be the closing costs? Will the lower payments from the refinance enable you to cover the closing costs, points (if any) and the fees reasonably?

There are several lenders who are offering refinance options for interest only loans. The Internet is a good source for getting information about these offers and also to find out more about interest only loan refinance.

Interest Only Loans provides detailed information about interest only loans, interest only loan rate, interest only loan calculators, pro and cons of interest only loan and more. Interest Only Loans is the sister site of Mortgage Amortization Schedule.

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