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Interesting Times Interesting TimesIn the last few months I have had more than a few calls from people who wanted to refinance their existing mortgage in order to get out of their current loan because it was an "interest only" loan. Admittedly, nothing sounds more ominous than an interest only loan; if all that is ever paid on the loan is interest, it will never be paid off, right? Well, not really, once your interest only period runs out (usually anywhere from 36 to 120 months), the loan balance is converted to a fully amortizing loan over the remaining life of the loan, resulting in a substantial increase in payments. So, remembering that closing costs are a part of refinancing, is it a good idea to refinance to get out of an interest only? The thing to understand about interest only loans is that you are only required to pay the interest that is due each month. Having done that, you can pay any amount you wish towards the principal, reducing your loan balance and reducing the amount of "interest only" that you will be required to pay next month. Some loans do have prepayment penalty clauses, which prevent you from paying down your principal by more than 20% of the balance in any one year without paying a penalty, but on a $100,000 loan this means you could still reduce your principal by up to $20,000 without incurring this penalty. If your current loan is a variable rate interest only, or if it is a high fixed rate, it may make sense to consider refinancing to a fixed rate loan…or it may not. It all depends on your circumstances, how long you plan to be in the home, your loan balance, your budget, etc. Sit down with your mortgage person and go through the numbers as they relate to your situation, and make your decision based on solid numbers, not hype or a sales pitch. Remember, nobody cares as much about your money as you do.
Carl Trawick is a Mortgage Specialist and Licensed Mortgage Broker with the firm Access e*Mortgage. He can be reached at 904-343-1145 or ctrawick@nefcom.net
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