Interest-only mortgages are making a bit of a comeback, at least among the very wealthy.

About 14 percent of all private mortgages issued in the first 10 months of last year were interest-only mortgages, according to recent figures from the data analytics firm CoreLogic. Private mortgages often tend to be jumbo loans and are those not backed by Fannie Mae, Freddie Mac, the FHA or other government-related entity.

Applications for interest-only jumbo mortgages are up nearly 50 percent so far this year at Bank of New York's Mellon wealth-management group, according to AnnaMaria Andriotis of the Wall Street Journal, while interest-only loans make up nearly one-fifth of the private jumbo loans originated by nationwide lender EverBank.

Other lenders are reported to be readying interest-only loan products for the jumbo mortgage market as well.

Aimed at high-end market

There are some key differences between the current round of interest-only mortgages and the ones that were popular during the years of the housing bubble. First, the new loans are only available to high-end borrowers - typically those seeking mortgages of $1 million and up. They also require substantial down payments, often 30 percent or more of the purchase price.

Interest-only mortgages have always been attractive to a certain type of well-to-do borrower. In some cases, the borrower might find it more profitable to put his or her money to other uses rather than paying down mortgage principle. Others may be involved in professions where their income stream is highly irregular, so an interest-only mortgage allows them to pay off big chunks of mortgage principle at those times when the money comes in.

That's a far cry from the small-value interest-only mortgages that were common during the housing bubble and allowed many borrowers with modest incomes to overextend themselves financially.

These high-value interest-only mortgages do have potential downsides. First, the mortgage rates are higher than on a regular jumbo loan where the borrower is paying both principle and interest. Second, they tend to be adjustable-rate mortgages (ARMs), which keeps the interest rate low but does expose the borrower to potentially higher payments if interest rates should rise. So lenders like to make sure that potential borrowers have plenty of liquidity before approving such loans.

Published on August 2, 2014