Have you taken out an interest-only mortgage but want to shift to an amortized plan? You can refinance your existing mortgage with a fully amortized home loan. Read on to find out why an amortized loan is beneficial over an interest-only mortgage in the long run.
Interest-only mortgage – What it means
Interest-only mortgage is not a type of home loan in ideal sense. It is more of a loan feature and a number of home loans can be considered to be interest-only mortgages. As for instance, you may take out a 30-year fixed mortgage with a 10-year interest-only feature. It means that you’ll have to pay only the interest for 10 years. If you do not refinance it after the completion of 10 years, then you’ll have to increase your monthly payments to an amount, which will be sufficient to repay the balance amount within the remaining 20 years.
Disadvantages of taking out an interest-only mortgage loan
In spite of the fact that interest-only mortgage helps you to become a homeowner by paying only the interest rates for a certain period of time, yet it has a number of disadvantages, which are discussed below.
- Interest rate may increase: If case of an interest-only ARM (Adjustable Rate Mortgage), then the rising mortgage rates can make it quite difficult to pay off the entire loan.
- Difficulty to afford payments later: You may face a lot of difficulty to afford the principal payments at the completion of the interest-only period.
- Cannot build equity: As you cannot build equity on your home, you’ll not be able to take out a second mortgage by pledging the equity.
Moreover, you still have to repay the original loan amount even if the property does not appreciate in value. An interest-only payment option can also cost you more in the long run. Therefore, it is always better to refinance your interest-only mortgage with an amortized loan after the completion of the interest-only period.
Fully amortized mortgage: What it means
In a fully amortized mortgage, you need to repay the full loan amount through a series of payments over the duration of the loan term. Thus, mortgage amortization is actually a schedule of loan repayment. The monthly mortgage installments comprise of the monthly interest as well as a portion of the principal loan amount. Thus, your outstanding loan amount goes on decreasing with every mortgage installment.
The advantages of refinancing your interest-only loan
You can refinance your interest-only mortgage with an amortized loan as the latter is beneficial in the long run. Read on to know the advantages.
- Build equity: As you pay your periodic installments, the principal loan amount gets reduced. Thus, you can build equity much faster with an amortized loan.
- Save on interest payments: In an amortized loan, each mortgage payment helps to reduce the principal amount thus reducing the total number of interest payments.
Apart from above, if you refinance your interest-only mortgage with an amortized loan, then you’ll be able to take out a second mortgage by pledging your home equity.