Having an interest-only loan, a home buyer pays only the interest portion of a mortgage loan for a predetermined period of time. The simple fact that his payments are reduced for that given time may let him purchase a more expensive home than he would have qualified for or to make use of that money for different functions, but once a home buyer gets into an interest-only mortgage, he might 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; should you make the minimum required payment every month, you'll just be paying attention. You'll never pay down your mortgage balance. You could spend years earning home payments which don't pay off the loan. Refinancing the mortgage to a more conventional plan that points in interest and principal ensures you will observe a reduction in your primary loan amount every month, helping you build equity in the property.
Strategy for the Future
Based on MSN Money Central, an interest-only loan generally graduates. You know for certain your payments will be fixed for the first five years at a specific interest rate, but after that period things change. You'll still pay only interest for the subsequent five decades, but now the speed will be variable and will increase each six months. At the 11th year that the rate will remain variable, together with the loan requiring you to create both interest and principal payments. Say that the interest only portion of your mortgage is scheduled to last ten decades. It can be difficult to plan for the future if you're not very sure what your true house payments will be in the end of that time. Refinancing to a fixed-rate loan will enable you to be aware of what your payments are going to be for the life span of their loan, and can help you to budget your money.
Repair Your Interest Rate
The variable rate correlated with the majority of interest-only loans is beneficial only when the interest rates return. The uncertainty involved with varying rates makes an interest-only loan a risky proposition for most cash-strapped homeowners. Refinancing to a interest rate you understand is not likely to change, with payments which aren’t likely to change, can offer peace of mind.
Spend Less Interest
Paying a mortgage loan which involves payment toward the principal lowers the equilibrium a bit each month. As your balance goes down, you pay interest on the loan. Borrowers with a conventional mortgage loan end up paying less in interest than those sticking with interest-only loans.