How can I get out of a interest only loan, after the 1st yr?

Answer 1

What were the reasons you chose it in the first place? Lower payment / cash flow needs? It seems that because you are asking this question, you were not properly educated on why this program would be better than others to address your needs and goals?

As a general rule, I/O loans are good temporary loans, that you should expect to refinance; and used when you have unexpected income issues; or when you know you have sufficient equity in your home and plan on moving to a new home within the short term future. They should not be used to purchase more home than you can actually afford otherwise.

There are several ways to switch from one program type to another.

The most common method would be called a Rate & Term Refinance and is relatively easy to do. You could move to an Option ARM's which are also VERY useful mortgage programs, BUT ONLY IF you use them properly!! Using them properly comes with proper education of the program terms. People who say Option ARM's are junk, are usually not well educated on the purpose and proper use of one. There are many programs available to you, it's a matter of matching your needs & goals with the best program to fulfill them; something which a competent mortgage planner can help you with.

You could also sell the property, but that doesn't seem to be what you are after.

You could, technically, just default on the loan, and let them foreclose, but that would NEVER be a good way of doing things, and would severely hurt your credit for years to come.

There's the bankruptcy option, but I wouldn't suggest that either to be honest.

Also, you may have some pre-payment penalties (PPP) with this type of loan, and you should speak with a competent mortgage planner to find out what is best for your particular situation. It may be worth it to wait out the PPP time so your not sending more money down the drain.

Answer 2

You can also just pay the fully amortized payment (principle and interest) each month instead of the Interest Only payment. Just add the additional money each month to your payment.

That way you avoid the cost of refinancing and you are paying your principle down at a much faster rate. Non Interest Only Loans apply very little towards principle in the first few years of a loan. By having an Interest Only loan, you can pay down your balance at a much faster rate, and as you pay it down the Interest Only payment will go down as well.

It amazes me how many people will pay to refinance out of an Interest Only loan instead of just paying the additional amount each month. You are allowed to pay more than what the payment coupon states.

Good Luck,

Greg S.

Answer 3

I am a state licensed mortgage loan professional, and there are many areas that will determine if you are eligible to obtain an interest only loan. First, is the "1st year" you list in your question your first year of having a mortgage, first year of renting..etc? It is dependent upon employment history, rental/mortgage history, credit bureau scores, your DTI (debt to income ratio), open and active trade lines on your credit report, number of delinquencies and their amount and date, history of foreclosures/bankruptcies and their filing or discharge date, disposable income, property location... etc etc. Also if you are in your first year of a mortgage it is important to consider if there are any prepayment penalties involved in paying off your mortgage early. Be aware however, because although an interest only loan does lower monthly payments and free up income, it does not help knock out the principal on the loan which may result in a negative amoratization... something that you don't want to mess around with later. I would consult with a mortgage professional, and DO NOT let everyone pull your credit. If you just obtained a mortgage or had a broker pull your credit, by law they they are required to inform you of you scores. Use those scores to simulate scenarios with other lenders, and then when you find one that works, allow them to obtain your credit report. Pulling your credit report to many times can lower it at least 2 points per "pull". Good Luck! :)

Answer 4

Read the terms of the loan carefully. Some loans are written with a prepayment penalty clause; you actually get charged a steep fe if you pay the loan off early. If you have no prepayment penalty, refinace the loan. If you do have a prepayment penalty, wait till it expires (usually they are limited to two or three years) and then refinance it.

Answer 5

You have to pay it off either by selling the house or refinancing. You need to check and see what your payoff is going to be if you decide to sell so that you can ask for the amount necessary to pay the loan off as well as the closing costs. Unless your house has appreciated in value substantially over the past year, you may be forced to come up with cash to be able to sell. Refinancing to a principal + interest loan will result in higher payments and you may not qualify to do this unless you have generated some equity in this property or are in a position to come up with cash to close. If it comes to a foreclosure situation, I would contact the lender and ask them about whether they would accept a deed in lieu of foreclosure.

Answer 6

I agree- pay it off or refi and don't get another interest only loan- or a pay option arm loan.. waste of $$.. You may want to see if you have a prepay penalty as well because if you do, it may be within your best interest to wait until it expires unless the PPP (prepay penalty) is relatively low and that is not likely. Good luck!

Answer 7

pay it off.

Refinance.

Sell the house/car/whatever you have the loan against.

Don't default - you will have trouble getting another loan again for several years.

And don't do interest-only loans again. If you can't afford to pay the principal, you can't afford the loan. That's basic economic common sense.

Answer 8

Refinance. However, no one will give you a loan since your house is worth less than the loan.

Answer 9

The only option is to pay it off, refinance, work with a credit counseling agency, or file for bankruptcy. You signed the papers and accepted the debt. It's yours now.

Answer 10

If you want a fixed rate to lock in today's interest rate, you need to refinance. If you have a prepayment penality, you either need to pay it or talk to your current lender, they will most likely waive it for you if you refinance with them.

Regards