Interest Only Loans can be Refinanced to Secure a Better Deal

The current economic climate has prompted a lot of out-of-the-box thinking by lenders and borrowers alike. The fact is that lending is an essential part of any economy, and finding a way to survive these difficult times is something important. To ease the pressure on borrowers, for example, interest only loans are available.These loans are approved just as any normal loan might be, but the repayment schedule is tailored to accommodate the financial situation of the borrower. Basically, the terms of these loans see loan interest paid only, and none of the principal. As a result, the monthly repayments are lower and the loan is generally more manageable.But, of course, like any loan, the principal will have to be repaid eventually, and for some borrowers that means getting refinancing loans where interest only is paid is a real possibility. This is not an especially complicated thing to do, but there are some terms that should be known before choosing this option.Interest Only Borrowing ExplainedIt may come as a surprise that interest only loans exist at all. In fact, they do seem a little impractical from the point of view of the lender. But it is important to know that the arrangement whereby only the interest is repaid is a temporary arrangement.The reason why it exists is to allow the borrower a period of time to adjust, and is usually granted when the typical monthly repayments are quite high. A perfect example is the purchase of property, though this is usually open to commercial purchasers, rather than private purchasers. Negotiations with some lenders can see loan interest paid only for perhaps the first year of the mortgage.However, after an agreed period - whether 6 months or a year, or more - the principal will then be due for repayment, meaning the monthly repayments increase dramatically. This sometimes means refinancing loans where interest only is paid becomes necessary.How Refinancing WorksThere are a number of different interest only loan packages available on the market. Some of them stipulate that the total principal owed after the interest only period be repaid in one lump sum, while others will stipulate that the owed principal be divided between the remaining monthly repayments.That is the problem when borrowers commit to keep the loan interest paid only for any initial period. When the time comes to pay the principal too, the huge increase in repayments can be a major shock to the system. The interest could grow by 900%, which equates to monthly interest of $150, increasing to a full payment of $1,500.Refinancing loans where interest only is paid effectively means taking out a new loan to lessen the interest rates applied and, therefore, lower the monthly repayments. What should be kept in mind, though, is that the refinancing loan is usually a regular loan, which requires principal and interest to be repaid at the same time.However, the advantage is that, because the original interest only loan is repaid, the credit rating of the borrower is improved, and the interest rate is appropriately lowered. Given that the interest rate charged with loans were loan interest paid only, the advantage is twice as good.Small Print PenaltiesThere is little doubt that these kinds of loans are perfect for investors seeking to lighten their initial payments, and to buy time before reducing the overall cost. But for everyone, refinancing loans where interest only in paid will involve the payment of some penalties.These can be quite high, and is designed to protect the lender against any perceived loss due to accommodating the borrower. This must be taken into account too, but for those with much to gain, this expense from interest only loans is worth it.