Home » Business » Real Estate Special
Key factors to consider on interest-only mortgages
Print Edition
Don’t call it a comeback.
Interest-only mortgages got a bad reputation in the aftermath of the housing bust, but they’ve managed to stick around as an option for homebuyers who can meet stricter lending guidelines enacted by the government in recent years.
The loans can lower monthly mortgage payments by letting borrowers put off paying the principal on their loan for several years. When the interest-only period ends, the borrower’s monthly payment spikes as they begin to pay a combination of principal and interest until the loan is paid off.
That monthly payment shock, often accompanied by a higher interest rate on adjustable-rate interest-only loans, is what got many borrowers in trouble a decade ago.
One reason is that many of those borrowers qualified for their loans on the basis of their ability to repay the lower, interest-only payment. When their monthly payment reset higher, many couldn’t keep up.
That’s no longer the case. Now lenders are required to determine whether borrowers qualify for any interest-only loans, or other adjustable-rate mortgages, based on whether they can afford to make the eventual bigger monthly payments that await them once the initial interest-only period ends.
As a result, such interest-only loans now make up only about 0.2 percent of all adjustable-rate mortgages, or ARMs, which account for about 4 percent of all home loans for purchase and refinancing, according to data from CoreLogic.
Use of interest-only mortgages peaked 10 years ago at the height of the housing bubble at around 10 percent of all ARMs.
“The big difference here is interest-only loans are back to being the niche product that they traditionally had been,” said Greg McBride, chief financial analyst at Bankrate.com. “The go-go days of the housing boom were the exception.”
Still, rising home prices can make interest-only loans a tempting option for borrowers who are interested in a lower mortgage payment and can qualify for such a loan under today’s stricter guidelines.
At least one lender is looking to expand access to interest-only loans to a broader range of homebuyers, not just the affluent buyers who typically take advantage of such loans.
In July, United Wholesale Mortgage began making interest-only home loans through its network of mortgage brokers. The loan program covers mortgages as low as US$250,000. That’s just above the US median home price of US$236,400, but well below the recent median price in Southern California of US$426,000.
Even with today’s stricter guidelines aimed at ensuring borrowers can handle interest-only loans, they carry potential financial risks.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
