Expert Q&A Archive
Should I refinance my interest-only loan to a fixed rate one ?
That home equity loan is now at an interest rate of 8.75%, and itís also an interest-only loan, and I really donít understand very well about the interest-only. Someone has asked me would I be interested in the fixed rate loan if I could get it. (Initially, when I took it out, I was told that the fixed rate was not available, only the interest-only.) Should I refinance to a fixed rate loan?
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There are usually costs involved. Make sure you are aware of the costs of refinancing. It may be better to work out a plan to pay down the debt you have by making additional payments. Interest only means just that - the payment you are required to make is only interest on the amount you borrowed. If you want to start paying it off you need to make larger payments. Look at the fixed rate they are offering. Look at the costs involved. Determine your best course of action.
Anne Delle Donne:
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I would look very closely at the closing costs (if any) on this loan--especially if you are going to roll these into the balance of the loan. Depending on your financial situation, you may want to fix the rate on your HELOC Fixed rates are typically a little higher than the variable rates, but you have confidence that the amount will not change each month depending on interest rates. Also, if you are concerned that the variable rate will fluctuate upwards to an amount that will make the loan re-payment difficult, you may want to fix the interest rate as well. Interest only loans typically have a lower monthly payment, but BUYER BEWARE that you are not paying any principal down, and typically after 10 years you have to pay the loan back (the full amount you borrowed) or refinance at the current interest rates.These loans can be "sleepers," where you do not realize the implications of only paying the interest until they require [that] you pay it back in full.
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Typically, line of credit loans are adjustable. You know you have a line of credit if you are given checks that can be drawn on your equity line (so you can draw money out, up to the limit of your line). Your monthly bill typically requires only the minimum interest payment, which is probably what the interest-only reference is to (interest only means that the payment you make is for interest only and does not include any principal repayment. As such, the principal balance would never be paid down if you only pay the minimum). An equity loan is a set amount of money for a set amount of time and can be at a fixed rate, similar to how a first mortgage would be established. If you have drawn out a substantial amount on your line of credit, you may want to consider paying it off with an equity loan. This will require the payment of principal. Keep in mind, however, [that] you will no longer be able to draw money out of an equity loan (versus a line of credit). If you do not fully understand the loan and its terms, I'd seek another lender.