For instance, making interest-only payments and putting the difference into an investment which brings a higher rate of return. Traditional mortgages offer no such option.
However, there are other things you can do with the extra cash you can have every month. For instance, you could pay down high-interest credit card debt. Save for your children's college tuition. Buy or lease a second family vehicle. Increase your home's value by making home improvements. Set aside money for a rainy day. Depending on your existing loan balance , refinancing to an interest-only loan could get you access to thousands of dollars over the course of several years to put to use as you think is better. Interest-only refinancing may also be a good option for people who expect move again before the end of the interest-only period of their home loan.
In addition, an interest-only loan gives you the option of paying just the interest, or paying interest and as much principal as you want in any given month. The interest-only option is available in the initial years of the loan for a fixed number of years. After the interest-only period, all payments will then include principal and interest. Interest-only loans can be either traditional fixed-rate or adjustable-rate mortgages.
If you choose to make the interest-only payment one month, that month's payment is lower than it would be had you made the principal and interest payment. Your interest rate may or may not be lower than a traditional mortgage, but you will have the option of choosing your payment.
Experienced homeowners know that having this type of payment flexibility is one of the smartest ways to manage your personal finances. Refinancing from a traditional home loan to an interest-only loan has become popular because it gives you control over your cash flow. This example illustrates the payment flexibility of refinancing a $150,000 mortgage to an interest-only loan. With an interest-only loan, in months when you need more cash, you don't have to pay principal and interest.
One big misconception about interest-only mortgage refinancing is that if you're not paying down your loan's principal every month, you are not building home equity. That's not necessarily true. Homes in the U.S. have been appreciating between five and six percent a year. Chances are that even if you are not paying down principal, appreciation is building equity in your home for you.