How to Change From Repayment to Interest Only Mortgage

Figure out a long-term strategy before refinancing into a short-term solution.

There are many mortgage programs on the consumer market. The most popular still, though, is the repayment mortgage. This type of home loan is closed-end with a fixed interest rate. It is popular because it is safe and, when properly used, fairly easy to repay. However, if you will be selling your home soon or you are experiencing some financial hardship, you may want to consider an interest-only refinance. There is only one way to change a repayment mortgage to an interest-only mortgage: refinance.

Things You'll Need

• Repayment mortgage documents
• Income documents (pay stubs, W-2s, tax returns)
• Homeowners insurance policy
• Property tax bill

Instructions

1. Pull a copy of your credit score first. A refinance can be quite costly, even if you have good credit. If you have poor credit, though, it can be prohibitively expensive. You’ll want to make sure your credit is in good shape prior to refinancing. Pay for your FICO score, too. This three-digit number between 300 and 850 represents your creditworthiness. Excellent scores are over 720. Do not refinance unless your FICO is over 680.

2. Make a long-term plan. Interest-only mortgage payments cover only the interest due for the prior month. This means your mortgage balance remains the same. It is not a long-term solution. Therefore you must have an exit strategy (selling your house, renting a room in your home, refinancing again).

3. Research lenders based on your credit score. If you have an excellent FICO, you should only consult with local banks (if they offer interest-only mortgages) and high-end mortgage brokers. If you have some credit problems, you may need to consult with finance companies, too, like Wells Fargo Financial and CitiFinancial.

4. Fill out refinance applications at two or three lenders. Provide these prospective lenders with your income documents, your existing mortgage paperwork and a mortgage statement. This will help these companies provide as accurate a preapproval offer as possible.

5. Review all offers side-by-side. Pay close attention to the interest-only period offered. Most interest-only loans are interest-only for a fixed period (between one and 10 years) and then switch to a traditional repayment loan. Make sure the interest-only period fits in with your long-term plan from Step 2.

6. Accept a loan offer. Complete the refinance process. Ask for a breakdown of the final terms and fees once the refinance is final approved. Make sure the loan is still financially beneficial--loans often change after going through a full underwriting process.

References

• Bankrate.com: FAQ on Refinancing
• MSN Money: Many Still Finding Reasons to Refinance
• Quicken Loans: The Interest-Only Home Loan - The Facts

Resources

• AnnualCreditReport.com