For the past several years, it seems every month brought fewer and fewer choices for borrowers. This made my job both easier and more difficult. The easy part was the client had fewer options to consider so the conversation about comparing options was much simpler. The harder part was when the clients situation did not quite fit the one size fits all loan programs that were the stuff of Barney Frank’s dreams and desires.
One of the tenants of the Dodd-Frank Act was to save consumers from themselves at all costs, and interest only loans were deemed a significant threat to the public’s well-being. Interest-only loans are mortgage loans that the borrower only pays monthly interest payments on and never is required to make a principal payment, at least in the first several years.
Never Say ‘Interest Only’ again
As such it was deemed that Fannie Mae, Freddie Mac and FHA should never utter the words “interest only” again. Lenders who originated such loans would never be able to sell them to the agencies, and for a long time there simply have been few if any interest only options. Lenders who do originate interest only loans will have to hold them on their books for the duration.
Quite recently, one of the lenders we represent has brought out an interest only loan program, and I expect there will be some takers for it, though it is not the deal it once was and this is not a program for everyone.
One will not find a 30-year fixed rate on an interest only loan, rather the term will likely be fixed for 3.5 or seven years. After the initial period, the loan will adjust annually, and after 10 years, the loan will convert to a 20-year amortization and the borrower will see a significant jump in monthly payments.
The rate will also be somewhat higher than on a 30-fixed or similar adjustable rate loan, and the required equity for a refi or down payment for a purchase will be substantially higher than taking out a fully amortized loan.
For a purchase one would have to put a minimum of 20 percent down and for a refi the maximum loan would be 65-70 percent LTV.
Worth The Effort
However for some the lower payment may make all of the above worth the effort. On a purchase loan of $400,000 with 20 percent down and a five year fixed rate the interest only payment would be $1,208. On a similar fully amortized loan the payment would be over $500 per month higher.
One must be well qualified as well with excellent credit and fully documented income, and one will be qualified at a higher payment than the interest only payment to assure when the loan goes into the fully amortized phase the borrower can afford the higher payment and a substantial amount of liquid assets is required. Interest-only loans are also unavailable to first time homebuyers.
Hopefully this change will mark the start of more loan programs and we will see more and more options available for borrowers.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at www.mtnmortgage guy.com.