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An Interest Only Refinance Might Be Just the Solution You're Looking For

Updated on June 30, 2009

If you're like most people today, you're looking for every possible way to save some money. If you're a homeowner with some equity in your house, an interest only refinance might be just the answer for you.

Like many people, you may have heard the term “interest only refinance”, but not really understood what it is. This article will help you to better understand exactly what an interest only refinance is, and how one may be able to benefit you. We'll also take a quick look at what's going on in the housing market currently. Although we've had nothing but bad news for what seems like forever, things seem to be turning somewhat lately. Latest news shows a kind of good news/bad news scenario. …At this point though, I think any "good news" is more than welcome.

flickr image by rutlo
flickr image by rutlo

First, let's take a look at what's going on in the market and real estate values in general. Obviously the general value of homes not only significant affects people who are in the market trying to buy or sell their homes, but for people attempting to refinance their mortgage, overall home values matter a lot as well.

So, we just had a better than expected S&P Case Shiller Home Index report for the month of April. With this index shows is the general trend in home prices in 20 of the largest cities across the United States. Although this is considered a lagging report, the good news is that it showed fewer native readings than in the reports we've had most recently. In other words, we are seeing a slowing pace of declines in home prices in most areas. In fact, in a couple of markets including Dallas and Denver, the report actually showed some home prices going up a bit. Like I said before, any good news will be fully welcomed.

I don't mean to be a party pooper but, like I mentioned at the beginning of this article, there is a "bad news" aspect that goes along with this good news. In truth, it's not necessarily "bad news", it's simply a reality check that the excitement about the good news should probably be tempered somewhat, and here's why.

Obviously we've been in recession for a while now with home prices being driven lower and lower. As we start to come out of the recession, even though people are willing to pay more for a home now than they were say, just a few months ago, lenders still need to base a value on the property based on an official appraisal. The thing about appraisals is that they're based on comparable home sales in the area over the prior six months. Six months ago is probably when home prices were the most depressed. Because of this, it's going to be very difficult to get appraisals coming in at "true" market value, as far as what someone was willing to pay for the home. If the value doesn't come in, there may be difficult in getting a loan. Without the loan, the house won’t sell. Without the house selling, we don't start to build a history of homes selling at higher and higher prices.... it's a real viscous cycle, and a real pain in the...

flickr image by surlygirl
flickr image by surlygirl

Let's get onto the interest only refinance aspect of this article. If you're looking to save a little bit of money to help you with your monthly budget, and you're a homeowner who is fortunate enough to still have some equity in your home, you may want to consider refinancing your mortgage. With rates at extremely low levels, that alone could save you money every month. To save even more money, you might look into an interest only refinance.

In an interest only refinance, all of your monthly payment goes only to interest; there is nothing added going to pay down the principle at all. So while you're not building equity in your home the way you would like to ideally, it will still lower your monthly obligation as far as your mortgage payment because you have that much less that you're paying.

Many people are uneasy with the idea that they are not doing anything to pay down the principle. That's understandable. However, in tough times like these, you do what you have to do. If an interest only refinance can save you enough money to make sure that you stay in the house long term, that's certainly a better alternative than running out of money and not being able to pay the mortgage or other bills. Ultimately of course the decision is yours. However, for many people, an interest only refinance has been a very good option for them and worthy of your consideration.


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    • jazzuboo profile image

      jazzuboo 8 years ago from Queensland, Australia

      Good advice here. I personally will continue to pay as much as I can into the equity of my home, but it's understandable that not all are in a position to do so, and it's better than losing your home altogether.