Interest-Only Mortgages

Page 1 of 2 ( 1 2 )

Lenders are offering products that help buyers ease into home ownership in tough housing markets. It’s important to understand what these options mean and whether they benefit the borrower in the long run. Interest Only Loans With an interest-only feature, payments on the principal are temporarily left to the discretion of the borrower. It’s an offering that seems to tip on its head the idea of building home equity. If you aren’t paying on the principal, you are not building ownership in the house. But homebuyers in California, the District of Columbia, Virginia, Arizona, and other areas where prices have risen dramatically, are using it to get the homes they want. The details of interest-only options vary by lender. Many are offered on adjustable rate mortgages (ARMS). With an adjustable-rate I/O loan, the interest-only period is typically five to ten years. But, because it is an ARM, the loan will see periodic rate adjustments. The interest rate might be reset on an annual basis, increasing or decreasing interest payments each year. The fully amortized payments—where principal and interest are figured into incremental payments to pay off the loan—could also change each year. Fixed Rate and Adjustable Rate Loans A fixed-rate interest-only mortgage also allows for interest-only payments over first five to ten years followed by a set schedule of fully amortized payments. Since the interest rate is fixed, there are no surprises when the remaining principal and interest payments are recalculated. A hybrid I/O could offer fixed payments with an adjustable rate. These loans offer an initial fixed-rate, interest-only payment period of five years. At the end of five years, payments rise and fluctuate with changes in the interest rate. Data is showing that more borrowers are opting for the interest-only loan feature. LoanPerformance, which compiles and analyzes mortgage finance data, says the percentage of I/O mortgages doubled in less than two years. It is even growing as an option among those refinancing existing mortgages. Loan Eligibility Lenders look at every aspect of a borrower’s profile to determine eligibility for any loans, including those with an interest-only feature. As with traditional loans, lenders review income, debt, credit score, and security of the home before making a decision. But just because a loan product is available doesn’t mean it’s right for all borrowers. “When people see a lender in the home-buying process, they learn not just how much they can get but, more importantly, how much they can afford to pay,” says Michael Fratantoni, senior director for research at the Mortgage Bankers Association. People need to know all of their borrowing options, but lenders’ products are not “one size fits all.”

...Continued - Page 1 of 2 ( 1 2 )
Next Page >