Interest only refi

[Santosh Prabakar]

I bought a fixer in Oct 2022 in leander TX and due to market conditions lm unable to sell it. I plan to make it a rental and would like to do a cash out refinance for $125k. What are the rates for interest only refi? Will there be any prepayment penalty? Any big disadvantage of doing interest only? 

[Stephanie P.]

Quote from @Santosh Prabakar:

Quote from @Jay Hurst:

Quote from @Santosh Prabakar:

I bought a fixer in Oct 2022 in leander TX and due to market conditions lm unable to sell it. I plan to make it a rental and would like to do a cash out refinance for $125k. What are the rates for interest only refi? Will there be any prepayment penalty? Any big disadvantage of doing interest only? 

 @Santosh Prabakar    What do you think the value of the property is?  What do you currently owe on the property?    Those items and of course credit score will determine interest rate.  If there is a pre-payment penalty depends on the program you go with.  If you use a debt service coverage ratio program most in the market do have them although there are some without.  

The obvious disadvantage of the  interest only is of course not paying any principal, but as you likely understand there is very little principal paid in the first years of a 30 year amortization schedule so that is not always a big deal. The other is there is typically a rate adjuster for interest only meaning the rate is higher even if your payment is lower, but it still can raise your cost of interest. 

 The value of the property is around $360 to 380K and bought it with cash. Credit score is above 780.

 Using 360K for value, your max loan amount would be 270K (using 75% loan to value as a max).  If you only want 125K and the value is 360K, that would be great because your pricing would be maximized at 35% ltv.

Rates vary and there's a range to pick from. You can buy it down or buy it up to save points. If you were going to keep it for a while, with that kind of leverage, I'd buy the rate as low as I could and not worry about interest only. Many DSCR lenders have their floor rates set at 7.375%. The monthly principal and interest payment on a 125K loan at that rate would be $838 per month. On an interest only loan at the same rate would be $767

Hope that helps

Stephanie