How to Change From Interest-Only to a Fixed 30-Year Mortgage
Many homebuyers take out interest-only mortgages when interest rates are low and seek to refinance the loans before rates rise. Some people take out interest-only mortgages when they do not plan to stay in a house for long or if they cannot afford full principal and interest payments. If circumstances change, these buyers often explore refinancing options. Conventional 30-year mortgages have fixed monthly payments and relatively low interest rates compared with nonresidential loans.
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Things You'll Need
- Mortgage statement
- Two years of tax returns
- 60 days of bank statements
- Two pay slips
- Homeowners insurance
- Deed
Instructions
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Go online to bankrate.com, lendingtree.com and the websites of banks in your area. These sites will show you the average interest rates for 30-year mortgages. Read the full description for each rate, because some rates assume that the borrower intends to pay points to lower the rate.
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Contact up to three lenders, including your current mortgage lender, and submit a preliminary application. This application relies on information your provide verbally. You must provide accurate information to prevent your application from being rejected when verification occurs. It normally takes 24 to 48 hours for a pre-approval.
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Review the terms offered by the lenders, and let each one know that you have been shopping for rates. Some lenders may lower your rate to undercut rival lenders. Decide which lender you intend to work with, and give the loan officer your last two years of tax returns, 60 days of all bank statements, two of your most recent pay slips, your warranty deed and proof of homeowners insurance. Write a check to the lender to cover the amount of the appraisal. Give the lender your most recent mortgage statement. The lender will contact your current lender directly to get a payoff quote.
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Go to the loan closing and sign all of the loan documents. The new loan takes effect immediately, and most lenders require you to make your first payment within 30 to 45 days. Many lenders reduce your interest rate by a quarter percent if you set up an automatic monthly debit.
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Tips & Warnings
In theory, you can do a refinancing with a loan amount equal to 95 percent of your home's value. In reality, most banks limit refinancing loans to 80 or 90 percent of the home's value if home prices in many parts of the U.S. are depreciating.
You can borrow up to 96.5 percent of your home's value if you have a current mortgage backed by the Federal Housing Administration and refinance with a new FHA-backed loan. You can also avoid paying for a new appraisal in some instances if you refinance with an FHA-backed loan, because the FHA uses the purchase amount of the home to price the new loan.
Principal and interest payments are significantly higher than interest-only payments. Most banks restrict borrowers to debt-to-income ratios of 45 percent or less when qualifying them for loans. This means your total monthly debt payments cannot exceed 45 percent of your gross monthly income. This rule prevents many people from refinancing interest-only mortgages into fixed-rate loans.
