Interest-Only Loans Drying Up as Mortgage Option
Get widgets
Print
Facebook
RSS- By:
- Kirk Haverkamp - MortgageLoan.com
If you’re looking to purchase a home or refinance a mortgage, your options are getting a bit slimmer.
Interest-only loans, already a rarity after the collapse of the subprime mortgage market, are just about to dry up completely. They won’t totally disappear, but getting one will go from difficult to extremely hard.
Freddie, Fannnie backing out
What’s happening is that Freddie Mac and Fannie Mae, the government-supported secondary lenders who insure most of the mortgages made in the United States, have said they will no longer purchase interest-only loans after Fall 2010. Given the time it takes these developments to work through the system, you can expect that lenders are already starting to shut the pipeline down.
That’s too bad, because interest-only loans can be an effective financial tool for qualified borrowers who use them correctly. The problem was that, during the housing bubble, they were issued to many borrowers who could never afford them unless housing prices continued to increase. When the economy and housing market soured, many of loans defaulted and continue to do so.
Those losses are why Fannie and Freddie are getting out of the interest-only loan business. Many private lenders have already done so as well.
Advantages of an interest-only loan
At first glance, an interest-only loan may sound like a dumb idea. You take out a mortgage pay only the interest for the first few years, typically five or 10. At that point, the loan resets to a fully amortizing loan, meaning you have to pay off the entire principal, plus the interest, over the remaining 20 to 25 years of the loan. Naturally, that’s going to make your payments go through the roof.
But it can work quite well for some borrowers, particularly in a normal market where prices are stable or gradually appreciate. In particular, it can be a good choice for someone who doesn’t plan to stay in a home more than five or 10 years, and has no desire to ever own the home free and clear.
In that event, an interest-only loan can allow you to stay in the home for next to nothing – because mortgage interest is tax-deductable. Sophisticated investors sometimes use interest-only mortgages to allow them to invest their money elsewhere, rather than using part of it to pay down mortgage principal on a home they never plan to own outright.
Can you still get them?
There are a few places you may still be able to get an interest-only loan, despite Fannie and Freddie’s withdrawal from the market. Foremost among these are portfolio lenders who lend out their own money and don’t sell the loans to Fannie or Freddie in the first place. Many of these are also the lenders who underwrite jumbo loans (loans above Fannie and Freddie’s $730,000 maximum), so you may still be able to obtain one there.
Savings and Loan associations also tend to loan their own money and not resell their mortgages, so they may be an option for someone looking for an interest-only loan. Be aware, though, that you’re going to pay a hefty interest rate and down payment in order to qualify, as well as being able to demonstrate ample fiscal reserves. That way, if the property does lose value, the lender is covered against likely losses.
ARMs as an alternative
One option remains for borrowers seeking to minimize their mortgage payments and that’s an adjustable rate mortgage (ARM). Although these do involve paying down principal, they are available at considerably lower rates than a 30-year fixed-rate mortgage – possibly three-quarters to a full percent lower. With low rates that lock in for one to 10 years before resetting, these can be a good option for borrowers who don’t plan to occupy a home long-term.
Interest-only loans are a traditional mortgage tool and will likely make a gradual comeback as the housing market stabilizes and conditions return to historical norms. But in the meantime, options for very low-cost loans are limited unless you’re in a position to take advantage of specialty lenders.
Low Mortgage rates is our mission
Bringing the best rates on the market to
you is our primary focus. Fill the form to get a quote based on your conditions.
/Mortgageloan.com
-
New Home
Looking to get on the property ladder? Discover your spending power. Get a rate quote today.
-
Debt Consolidation
Are your debt woes getting you down? Explore your options now by filling out our form.
-
Home Equity
Is fluctuating home value a constant cause for concern? Our advice - take out a new loan today.
-
Mortgage Calculators
Need help getting a grip on your expenses and finances. Try one of our 137 multipurpose calculators.
Call For Rates
800-419-1494
Speak to a lender now.
We will match calls to our toll free number with our network of lenders.See Today's Rates
National Rates
| Loan Type | Today | +/- |
|---|---|---|
| 30 yr fixed | 3.72 |
|
| 15 yr fixed | 3.03 |
|
| 5/1 ARM | 2.75 |
|
Rates may contain points
Browse Mortgage Rates
Featured Guides
Browse our comprehensive guides to popular topics related to mortgage and personal finance.