The Benefits of Refinancing an Interest-Only Mortgage

With an interest-only loan, a home buyer pays only the interest portion of a mortgage loan for a set period of time. The fact that his payments are lower for that given period may allow him to purchase a more expensive home than he would have otherwise qualified for or to use that money for other purposes, but once a home buyer gets into an interest-only mortgage, he may begin to see the benefits of refinancing it into another type of loan.

Build Equity

An interest-only mortgage is exactly what its name implies; if you make the minimum required payment each month, you'll only be paying interest. You'll never pay down your mortgage balance. You could spend years making home payments that don't pay off the loan. Refinancing the mortgage to a more traditional plan that factors in interest and principal ensures that you will see a reduction in your principal loan amount each month, helping you build equity in the property.

Plan for the Future

According to MSN Money Central, an interest-only loan generally graduates. You know for sure that your payments will be fixed for the first five years at a certain interest rate, but after that time things change. You'll still pay only interest for the next five years, but now the rate will be variable and can increase every six months. In the 11th year the rate will remain variable, with the loan requiring you to make both principal and interest payments. Say the interest only portion of your mortgage is scheduled to last ten years. It can be difficult to plan for the future when you're not quite certain what your actual house payments will be at the end of that time. Refinancing to a fixed-rate loan will allow you to know what your payments are going to be for the life of the loan, and can help you to budget your money.

Fix Your Interest Rate

The variable rate associated with most interest-only loans is beneficial only when the interest rates go down. The uncertainty involved in variable rates makes an interest-only loan a risky proposition for many cash-strapped homeowners. Refinancing to an interest rate you know is not going to change, with payments that are not going to change, can provide peace of mind.

Pay Less Interest

Paying a mortgage loan that includes payment toward the principal lowers the balance a little each month. As your balance goes down, you pay less interest on the loan. Borrowers with a conventional mortgage loan end up paying less in interest than those sticking with interest-only loans.

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