Defining The Interest Only Second Mortgage

What exactly is an interest only second mortgage and is this a good option for your refinance? This is a common question and the informed consumer should know as much about mortgage loans as possible in order to get the best mortgage rate from your lender. Let’s start with defining what an interest only second mortgage is, and you will determine if it is right for your particular situation. If paying interest only on your mortgage is a good option for you then you should know the right questions to ask about this type of mortgage loan.

An interest only mortgage is one in which your payments consist of the interest only. This means that after the interest is paid off, you are paying on straight principal. For instance, if you have a $100,000 mortgage at five percent for a ten year term then your interest will be around $155,000 if it is compounded annually. For a refinance mortgage it works essentially the same way. You lose the equity in your home and pay off the interest. Once the interest is paid off, then you work on strictly the principal so that you are building the equity in your home with each monthly payment that you make.

Mortgage loan rates vary all the time and that is why so many people want to refinance their home mortgage. They want to get a better interest rate for their loan, or use the equity in their home for improvements, or to make a purchase. Many people refinance so that they can remodel their home in order for them to be able to sell at a higher price. Improvements such as exterior paint, new carpets or linoleum, an extra bathroom or bedroom or new appliances in kitchen can all make a huge difference in the selling price of a home.

The problem with interest only mortgages are that you don’t have any equity in your home for a very long time, sometimes not for many years. For instance, in the above example, if your interest was $155,000 on a $100,000 home for a ten year loan and your payments were $2100 a month, then you would have to pay for six years out of the ten that you were paying on your mortgage to get the interest paid off. The last four years of the loan you would be paying off the principal. However, the upside is, that you will build equity in your home very, very quickly the last four years of your home loan.

There are many other options besides an interest only mortgage. You can ask your mortgage broker or lender which options are available so that you can choose which one is best for you. A fixed rate mortgage in which you pay part of the interest and part of the principal each month is the normal way to go, but other options include an adjustable rate mortgage in which the rate changes every one, five or ten years, or longer term loans, with much higher interest but lower monthly payments, as well as balloon mortgages and other types of creative financing.