Interest – Only mortgages received a lot of bad press during the aftermath of the housing bust, but they have stuck around as a viable mortgage alternative to home buyers who meet rigorous lending guidelines enacted by the federal government in recent years.
Interest – Only mortgages can lower monthly mortgage payments by allowing borrowers to delay paying principle on their loan for several years. The down side of this mortgage program is the increase in mortgage payments when interest-only period comes to the end. At that time, borrowers begin to pay a combination of principal and interest until the loan is paid off.
The shock of the increase in monthly mortgage payments as a result of higher interest rates on adjustable-rate interest only loan loans have caused many borrowers to default on their loans in the past. This shock in monthly payments is often accompanied with a higher interest rate which results in many borrowers falling behind in their monthly mortgage. Many of those borrowers who qualified for loans based on their ability to repay the lower, interest-only payment. At the end of the adjustable-rate period borrowers monthly payments often reset to a higher interest rate that borrowers could not afford.
Now lenders are required to determine whether a borrower qualifies for any interest-only loans or other adjustable –rate loans based on their ability to repay the increase in monthly payments once the initial interest-only period expires.
According to an article in the Associated Press .02 percent of all adjustable-rate loans or ARMS which account for about 4 percent of all loans for purchase and refinancing, according to data from Corelogic.
Here are some things to consider when contemplating whether this type of loan is right for you:
- Be sure your interest-only loan program comes with a fix or variable interest rate at the initial stages when interest is the only amount paid;
- Be sure to budget for the anticipated increase in monthly payment usually after three, five, seven or ten year period;
- Lenders will require a larger down payment up to 20 % for interest-only loans compared to FHA or traditional 30 year, fixed rate home loans insured by the federal government.
Remember, during the initial period of an interest-only mortgage the borrower is only gaining equity if the home appreciates in value compared to a traditional mortgage where the borrower is paying part of the principle with every payment.
If you need additional information on interest-only loans send us an email or call 301-483-8073