Interest-only mortgages make a comeback

 Loan Programs, Residential Mortgage  Comments Off on Interest-only mortgages make a comeback
Jun 262015

For more information, please contact me at (512) 261-1542 or

By G. Steven Bray

One of the more notorious loan products back before the housing crisis was the interest-only loan. Homebuyers who wanted a larger home, but couldn’t qualify for a traditional mortgage, would use an interest-only program because of the lower initial payment, and some lenders were approving the loans based on that lower payment. When the interest-only period ended, borrowers would face a sharp payment increase when their payment started to include principal reduction.

But interest-only loans are not inherently dangerous. In fact, they can make sense in some cases. For example, the product could make sense to a starting doctor who is confident his income will rise in the future. At the end of the interest-only period, the payment shock wouldn’t be difficult for him to handle. Or consider the case of an investor who wants to allocate her money to higher earning assets. If her investment horizon is shorter than the interest-only period, she’ll never see the payment shock.

Today, the program is making a comeback, but unlike pre-crisis, today’s lenders require that the borrower qualify at the payment that would apply after the interest-only period ends. It’s a very conservative approach that will prevent many from using the product, but in today’s market, safety trumps utility.