Refinancing an Interest Only Mortgage

December 16, 2007

Refinancing an interest-only home mortgage to Avoid PMI

There are two aspects to one’s home loan rate:  The real rate and the “paper rate”.   For example, loans with PMI (mortgage insurance)  you have  a great “paper rate”, but when you add the monthly PMI cost ($70-$200) you have the real rate.

Most of my clients know I’m not a big fan of mortgage insurance (PMI).  For starters, PMI makes your payment higher than non-PMI loans and your closing costs will be higher since you must have an escrow.  For example, if you have a 6% interest rate + $90/month in PMI, you don’t have a real 6% interest rate until your mortgage insurance “falls off.”

It’s also true that this “credit crunch” is making it harder to avoid PMI.   However, you need to know the facts about PMI and the potential costs in getting out of it (usually with a refinance).

FACT:  Mortgage and real estate professionals know people are very rate conscious, so this is why people get home loans with PMI.   They get the psychological benefit of having a good rate- but, if they consider the cost of PMI their rate is actually much higher.  

FACT: Another “paper rate” is an interest-only home loan.   This is when one is only required to pay the interest portion of their home loan; not the principle.  It’s a great way to save a couple hundred each month–BUT one must be doing something strategic with the savings like paying off debt or establishing a savings account.  

If saving or paying debt aren’t your goals then an interest-only mortgage might not be the best route for you because there will come a day when the interest-only portion stops and real life begins.   ( By the way, If you have an interest-only rate please email me @ jon@mylendingplace.com and say “please send me info on converting my interest-only loan to simple interest so I won’t pay on my house for the next 40 years.)

So when is the best time to refinance an interest-only loan?   Here are 3 possible scenarios when a refi might make sense:

a) Pulling cash out to pay off high-interest loans;   Since you’re going to have closing costs to refinance your home loan you might as well pay off high-interest credit cards or cars in the process. Two birds. One stone.

Check out this PMI mortgage calculator:  http://www.finweb.com/mortgage-calculators/second-mortgage-calculator.html .   Or if you’d like to see what your home loan might look like call me and let me just show how refinacning might benefit you. 

b) When rates drop and you can save enough money monthly to justify the refi. 

c) To eliminate your PMI since it’s not really doing anything for you.     Remember, anytime you work with a mortgage professional they must show you how to get out of debt–not just create debt.  

As always, call /email if you have questions:

jon@mylendingplace.com

Posted in Refinance