This article about interest only loans being used again in a recent issue of Market Matters put out by the CALIFORNIA ASSOCIATION OF REALTORS® made me think about how different things are today. With lending qualification today, it is a very detailed and generally drawn out process one must go through today to get a home mortgage.
But after reading this and hearing from various lender representatives about some of the old loan products are becoming available again, it gave no some hope things were easing up a bit. Time will tell.
Loans for a niche market
During the height of the real estate cycle, many people complained that lenders issued interest-only loans too freely. Their availability now is restricted to a privileged few.
Making sense of the story
- A staple of the jumbo market, interest-only loans continue to be used by affluent borrowers to help them manage irregular cash flow, reap a tax benefit, or free up cash for investment elsewhere.
- In particular, people in the financial services industry who derive most of their compensation from yearly bonuses commonly rely on interest-only loans to keep their mortgage payments manageable the rest of the year. According to one lender, homeowners who use this tactic often take a portion of their annual bonus to pay down the principal amount on their mortgages, which in turn lowers their monthly mortgage payment.
- Because of this pay-down method, interest-only loans have evolved into a financial tool, and no longer a means to affordability.
- Resulting from big losses, Freddie Mac stopped backing interest-only loans in 2010, resulting in fewer lenders offering them. Lenders who still offer them have strict qualifying standards.
- Lenders generally require that the borrower have at least 30 percent equity in a property, and a minimum FICO score of 720. Determination of ability to pay back the loan is based on the fully amortized payment, not the interest-only payment.
- Additionally, most lenders who will extend an interest-only loan to a borrower will want to see assets to cover as many as 24 months’ worth of principal, taxes, and insurance payments.
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