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Does It Actually Make Sense To Refinance Into A Mortgage With Higher Monthly Payments?

Posted by  on Apr 01, 2010
 

How Can Payments Increase If Current Mortgage Rates Sit At Historic Lows?

When most people consider a mortgage refinance, borrowers usually look for the lowest interest rates and monthly payments. And now that current mortgage rates are settling back down to historic lows, many have been looking to convert their ARMs into a lower fixed rate mortgage. But surprisingly, these mortgage refinances come at a time when conversions might actually result in higher monthly payments for some borrowers--and in a larger sense, this can actually be a very good thing.

Interest-only home loans don't build up equity, but they do allow borrowers a few flexibilities. Some individuals have a better use for the money than paying down the principal, while potential buyers often prefer these mortgages as they can buy more home with less money during the initial interest-only period. Unfortunately, one reality that also can't be overlooked is the possibility that many homeowners simply couldn't afford the fully amortized monthly payment.

Popular Interest-Only Home Loans Of The Past

On the bright side, these interest-only options are still less dangerous than more exotic negative amortization type loans. But when compared to traditional thirty year fixed rate loans, these interest-only payments are based on a short-term strategy and the low payments only last so long. Borrowers continuing to pay the interest-only option either extend the life of their loan, or unknowingly set themselves up for a huge payment shock in the future when the entire balance is still due but there are only twenty years to repay it, not thirty. By refinancing your mortgage into a new, 30-year fixed rate fully amortized loan, it's common to see an increase in monthly payments despite lower mortgage rates--it the payment is much less than if you keep the original loan once it becomes a fully-amortizing twenty or twenty-five year loan. As homeowners, this refinancing option should be strongly considered especially if home ownership is a top priority.

Depending on your current interest rate, converting your interest-only mortgage doesn't automatically mean you'll face a payment increase. By shopping around and comparing mortgage quotes from a few lenders, some lucky borrowers can find refinance rates that allow a conversion and lower monthly payments.

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