When Interest-Only Loans Work

Interest-only mortgages can be disastrous for borrowers who misuse them or don't understand their implications. To help you decide if interest only home refinance rates are right for you, we've provided a list of situations in which interest-only mortgages work best.

• Borrowers wish to pay the principal when it's convenient. Homeowners with unsteady income might consider interest only home refinance rates because of the flexibility involved. When money is tight, borrowers can make an interest-only payment, and when they have enough cash, they can make a significant payment toward the principal. To pull this off, borrowers must be disciplined enough to make principal payments when they are not obligated to do so.
• Make substantial additional payments to lower the monthly payment. With most interest only home refinance loans, an extra payment one month will lower the required payment for the next month. If you expect to fall into a large amount of money in the near future, you should shop for interest only home refinance rates so you can reduce your mortgage payments with that money.
• The expectation of income growth. Borrowers who anticipate making much more money in the future might also benefit from interest only home refinance rates. During the interest-only period, the borrower can minimize expenses while growing his/her income or advancing in his/her career. Once the interest-only period expires, the borrower will then have the additional monthly income required to make the higher payment.
• Invest the additional cash flow. Many consumers who seek out interest only home refinance rates would like to invest the extra cash flow that an interest-only home loan can provide. Though paying off mortgage debt is typically the fastest way to build wealth, some homeowners might grow their wealth faster by investing in other endeavors. For this to be viable, the yield on the investment must be higher than the borrower's after-tax home loan rate because that is the rate homeowners earn when they repay the mortgage.
• Pay off high-interest debt. If homeowners have credit card debt, then paying off the mortgage should not be their first priority. Mortgage debt usually has a much lower interest rate than credit card debt, and the interest on mortgage loans is tax deductible. For homeowners with high-interest debt, interest only home refinance rates make sense because the borrower could devote the extra funds to paying off the higher-priority debts. Before you refinance for this reason, however, make sure you have the discipline to devote the extra money to debt and not to other less practical expenses.

If you have any questions, please visit our Frequently Asked Questions webpage.