Refinance P&I loan to IO loan

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From: Patrick Fletcher


If you have owned a property for 4 years on a P&I loan so the equity has now increased and the debt decreased if you refinance to an IO loan what is the best way of setting up the PIA ?

Would you just amend the original by lowering the loan amount and changing type to IO and add in the extra refinance fees or

would you setup a new PIA with no purchase costs just the refinance costs and the new loan at the new amount IO with the same depreciation figures ?

Thanks in advance
 
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From: Webmaster (Somersoft)


As simple as this sounds, it is actually a bit tricky. In trying to be as user-friendly as possible, the PIA takes the range of years that you specify for a P&I loan as the term of the loan and uses it to calculate the loan repayments. Thus if you specify a P&I loan over 4 years, the loan repayments will be huge and the debt will be nothing at the end of the term (4 yrs). To get around this you have two options:

(1) Specify the loan to be I/O and make lump sum repayments at the end of each of the first four years so that the amount owing at the beginning of the fifth year is correct, or

(2) Begin the simulation from the beginning of the fifth year. In this case you will need to eliminate the purchase costs and adjust the outlays to reflect your current equity and thereby end up with a loan amount that reflects the refinanced I/O loan.

Either way you end up with an I/O loan for the amount that you would rightly still owe at that point.
 
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