Interest Only Finance: What You Need To Know

This is how they work: in the month that you opt for interest-only, your payment is lower than a principal plus interest payment would have been. This payment flexibility gives you a great deal of control over your personal finances. Many people, recognizing the control of their personal cash flow afforded by an interest-only loan, have decided to refinance from traditional home loans to interest-only loans. For an example of the payment flexibility in such a refinance, let's take a look at how refinancing a $200,000 traditional mortgage to an interest-only mortgage might work:

$200K @ 5.75% Interest-Only Payment.............$958.00
$200K @ 5.75% Principal and Interest Payment....$1,167.00

Cash flow difference is $209.00 a month.

The Advantages of Interest-Only Refinance

Say there are months when you need more cash? If you've got an interest-only loan, you don't have to pay both principal and interest. You only have to pay interest. Interest-only refinancing is also a good option to consider if you expect to be in your home for less than the interest-only period.

The reduction in mortgage payment with an interest-only refinance gives you the greater spending power of additional money to use however you need it. If you contributed that extra money to your 401(k), for example, you would be managing your finances in a way that allowed you to let your money work harder for you. A traditional mortgage would not give you that option. In fact, refinancing to an interest-only loan could, over the course of several years, give you access to thousands of dollars - depending on your loan balance. These are just a few other ways you could make your additional money work for you:

- Pay down high-interest credit card debt
- Save for your children's college tuition
- Buy or lease a second family vehicle
- Increase your home's value by making home improvements

It's also important to realize that, in a period when homes are appreciating in value, that appreciation is building equity in your home. So even if you're not paying down your loan's principal, you can be building home equity at the same time that you gain the cash flow advantages of interest-only refinance.

About the Author:
Matt Schaub and Silas Ellman started ReallyGreatRate with a simple idea: give every consumer the speed and convenience of online loan service, while providing the most personalized financial solutions available. For more free info, go to Mortgage Leads (www.reallygreatrate.com)