The concept behind an interest only refinance is simple. For a set number of years - generally somewhere between 3 and 10 - you only pay the interest on the loan and save the money that would have gone toward the mortgage. It is important to note that, like many programs, this suits a certain type of borrower and is not recommended for everybody. That said, here are some benefits of the interest only loan.
Ability to invest
With additional money in your bank account each month, you can now take the money that would have been spent on a mortgage payment and invest it in something that returns a higher interest rate than the one on your mortgage.
Pay down debt
Another way to save with an interest only refinance is to utilize the extra cash each month to pay down high interest credit card debt. This could save you thousands of dollars over the years which could be invested or used toward mortgage payments.
Tax benefits
Deductible interest drops over the life of a typically amortized loan. With an interest only refinance, the principal remains the same, meaning you'll always have a larger amount of tax deductible interest.
You have options
If your income is irregular, you could benefit from an interest only refinance by paying only interest when times are slow and paying toward the principal during your busy times. You wouldn't have this option with a typical loan.
Expecation of a move in the near future.
If you plan to move in less than 10 years, an interest only refinance can be a smart move. If appreciation outpaces the principal amount you aren't paying on your mortgage, you will still have built sufficient equity. When you go to sell, you'll have no problem covering what you owe and will never have had to pay on the principal.
Remember, these are benefits, but the risk is very real with an interest only loan and you should heed the advice of a mortgage professional. You can also utilize our interest only calculator to see if this is an option that works for you.
