The miracle mortgage
How do you buy a home in a boom? The answer may be a new loan that's part blessing, part time bomb.
May 16, 2005: 12:02 PM EDT
By Cybele Weisser, MONEY Magazine
Mortgages and home equity loans
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Interest-Only Mortgage Loan - E-LOAN
E-LOAN offers loans for new home purchases or refinancing. Variety of fixed-rate...
www.eloan.com
Interest Only Loans
No doc loan, 100% financing, zero down COSI, COFI, CODI, interest only.
www.familyfirstmortgage.us
Instant Interest-Only Refinancing Loans
Refinancing only - no home purchase loans available. Fast form and no credit...
www.loansrc.com
Shop Low Interest Only Mortgage Rates
Submit a mortgage request and get rate quotes from multiple lenders for free....
www.interestratesonline.com
Video More video
CNN's Allan Chernoff explains the risks involved with interest only loans.
Play video
NEW YORK (MONEY Magazine) - Six months ago, Chris and Suzanne Bernier were just getting by. The couple's debt load had grown to more than $9,000 in four years as they relied on credit cards to fund a new camper, vacations and stuff for children Eryn, 16, Dylan, 13, and C.J., 3.
Though they had already refinanced their mortgage -- to a low 5.5 percent interest rate on a 30-year fixed loan -- and consolidated their high-rate credit-card debt into a bank loan, they simply weren't getting ahead.
"We were still living month to month," says Chris, 37, a desk officer with the county sheriff's department.
But now, by paying only the interest on a 4.85 percent adjustable-rate mortgage, the Berniers have an extra $400 a month that they are using to whittle down their debt and build up their savings. And they are confident that they will be able to buy a new, larger home within five years.
"We feel like we are finally on track to getting somewhere," says Suzanne, 36, a manager at a mortgage processing company. Chris agrees. "We've chosen to use the power of the interest-only loan for our own benefit."
Growing popularity
Like the Berniers, tens of thousands of Americans have recently discovered the power of paying nothing but interest on their home loans.
The appeal is easy to understand: When you don't pay down principal, you can save hundreds, even thousands, of dollars a month. Interest-only payments let you shoulder a bigger mortgage and buy a home you might not otherwise be able to afford. Or you can use the extra cash to pay down debts or fund a child's education.
Whatever the reason, consumers are finding the lure of lower payments hard to resist. According to mortgage data firm LoanPerformance, nearly a third of home loans made last year nationwide included an interest-only option, up from almost none four years ago.
In the hottest real estate markets in the country (particularly on the coasts) lenders say that as many as 70 percent of new loans are interest-only.
The problem: Those low payments don't last. Eventually, every interest-only mortgage converts to a regular one, and unless you sell or refinance before that time is up, you'll see a steep rise in your monthly payments. And because most IO mortgages are also adjustable, that increase could be doubly harsh if rates go up.
"I think there is a day of reckoning coming for these loans in the hands of the wrong people," says Patricia Houlihan, a financial planner in Reston, Va.
Still, an interest-only mortgage can be a sensible choice at times. If you are tempted to grab one -- or already have and wonder what comes next -- read onto learn more about this hot loan.
How the loan works
What people commonly call an interest-only mortgage isn't one particular type of loan. Rather, interest-only is an option that can be attached to any mortgage.
And in every case, after a certain time (usually five, seven or 10 years) the mortgage becomes fully amortizing, and you must pay both interest and principal. Because you're repaying the principal in 20 or 25 years, not 30, those principal payments are higher than they would have been.
Other than that, the terms are as varied as those on any other mortgage -- anything from a one-month adjustable rate to a 30-year fixed. IOs generally have a slightly higher rate (about a quarter of a percentage point) than the same loan without the interest-only feature (one reason lenders like them). But for most borrowers, that's a small price to pay for the deep savings that interest-only payments represent.
What can go wrong
The biggest problem is payment shock: Someday you will have to write a check to your mortgage company that's hundreds of dollars higher.
Take a $300,000 interest-only ARM that has a fixed rate for five years and then converts to a regular one-year ARM. If the one-year rate is 6 percent (a typical rate over the past 15 years), your payment would go from $1,335 to $1,933.
Another minus is that you don't accrue any equity during the interest-only term. Yes, it's true that you pay mainly interest in the first few years of any mortgage.
On a $300,000 traditional mortgage at 6 percent, for example, only $3,684 of the $21,584 you pay in the first year goes toward principal. But that quickly adds up. You'd have built about $21,000 of equity in five years, $50,000 after 10 years.
"The attractive feature of amortization is that it's automatic and every month the savings go up," says Jack Guttentag, a Wharton professor who runs www.Mtgprofessor.com, a mortgage information Web site.
Of course, this torrid real estate market has seemingly eliminated the need to pay down equity. Many home buyers figure they can quickly reap huge equity gains simply by owning a house. An interest-only loan is a foot in the door.
How do you buy a home in a boom? The answer may be a new loan that's part blessing, part time bomb.
May 16, 2005: 12:02 PM EDT
By Cybele Weisser, MONEY Magazine
Mortgages and home equity loans
Search for rates from hundreds of lenders.
No points only
Select Loan:
Select a Mortgage15 Yr Fixed Jumbo - $385K15 Yr Fixed Conforming - $165K30 Yr Fixed Conforming - $165K30 Yr Fixed Jumbo - $385K1 Yr ARM Conforming - $165K1 Yr ARM Jumbo - $385K3/1 Yr ARM Conforming - $165K3/1 ARM Jumbo - $385K5/1 Yr ARM Conforming - $165K5/1 ARM Jumbo - $385K7/1 Yr ARM Conforming - $165KARM Jumbo - $385K
State:
Select StateAlaskaAlabamaArkansasArizonaCaliforniaColoradoConnecticutWashington DCDelawareFloridaGeorgiaHawaiiIowaIdahoIllinoisIndianaKansasKentuckyLouisianaMassachusettsMarylandMaineMichiganMinnesotaMissouriMississippiMontanaNorth CarolinaNorth DakotaNebraskaNew HampshireNew JerseyNew MexicoNevadaNew YorkOhioOklahomaOregonPennsylvaniaRhode IslandSouth CarolinaSouth DakotaTennesseeTexasUtahVirginiaVermontWashingtonWisconsinWest VirginiaWyoming
Top things to know
Are you ready?
Lining up cash
Picking a team
The hunt
Closing the deal
For sellers only
Interest-Only Mortgage Loan - E-LOAN
E-LOAN offers loans for new home purchases or refinancing. Variety of fixed-rate...
www.eloan.com
Interest Only Loans
No doc loan, 100% financing, zero down COSI, COFI, CODI, interest only.
www.familyfirstmortgage.us
Instant Interest-Only Refinancing Loans
Refinancing only - no home purchase loans available. Fast form and no credit...
www.loansrc.com
Shop Low Interest Only Mortgage Rates
Submit a mortgage request and get rate quotes from multiple lenders for free....
www.interestratesonline.com
Video More video
CNN's Allan Chernoff explains the risks involved with interest only loans.
Play video
NEW YORK (MONEY Magazine) - Six months ago, Chris and Suzanne Bernier were just getting by. The couple's debt load had grown to more than $9,000 in four years as they relied on credit cards to fund a new camper, vacations and stuff for children Eryn, 16, Dylan, 13, and C.J., 3.
Though they had already refinanced their mortgage -- to a low 5.5 percent interest rate on a 30-year fixed loan -- and consolidated their high-rate credit-card debt into a bank loan, they simply weren't getting ahead.
"We were still living month to month," says Chris, 37, a desk officer with the county sheriff's department.
But now, by paying only the interest on a 4.85 percent adjustable-rate mortgage, the Berniers have an extra $400 a month that they are using to whittle down their debt and build up their savings. And they are confident that they will be able to buy a new, larger home within five years.
"We feel like we are finally on track to getting somewhere," says Suzanne, 36, a manager at a mortgage processing company. Chris agrees. "We've chosen to use the power of the interest-only loan for our own benefit."
Growing popularity
Like the Berniers, tens of thousands of Americans have recently discovered the power of paying nothing but interest on their home loans.
The appeal is easy to understand: When you don't pay down principal, you can save hundreds, even thousands, of dollars a month. Interest-only payments let you shoulder a bigger mortgage and buy a home you might not otherwise be able to afford. Or you can use the extra cash to pay down debts or fund a child's education.
Whatever the reason, consumers are finding the lure of lower payments hard to resist. According to mortgage data firm LoanPerformance, nearly a third of home loans made last year nationwide included an interest-only option, up from almost none four years ago.
In the hottest real estate markets in the country (particularly on the coasts) lenders say that as many as 70 percent of new loans are interest-only.
The problem: Those low payments don't last. Eventually, every interest-only mortgage converts to a regular one, and unless you sell or refinance before that time is up, you'll see a steep rise in your monthly payments. And because most IO mortgages are also adjustable, that increase could be doubly harsh if rates go up.
"I think there is a day of reckoning coming for these loans in the hands of the wrong people," says Patricia Houlihan, a financial planner in Reston, Va.
Still, an interest-only mortgage can be a sensible choice at times. If you are tempted to grab one -- or already have and wonder what comes next -- read onto learn more about this hot loan.
How the loan works
What people commonly call an interest-only mortgage isn't one particular type of loan. Rather, interest-only is an option that can be attached to any mortgage.
And in every case, after a certain time (usually five, seven or 10 years) the mortgage becomes fully amortizing, and you must pay both interest and principal. Because you're repaying the principal in 20 or 25 years, not 30, those principal payments are higher than they would have been.
Other than that, the terms are as varied as those on any other mortgage -- anything from a one-month adjustable rate to a 30-year fixed. IOs generally have a slightly higher rate (about a quarter of a percentage point) than the same loan without the interest-only feature (one reason lenders like them). But for most borrowers, that's a small price to pay for the deep savings that interest-only payments represent.
What can go wrong
The biggest problem is payment shock: Someday you will have to write a check to your mortgage company that's hundreds of dollars higher.
Take a $300,000 interest-only ARM that has a fixed rate for five years and then converts to a regular one-year ARM. If the one-year rate is 6 percent (a typical rate over the past 15 years), your payment would go from $1,335 to $1,933.
Another minus is that you don't accrue any equity during the interest-only term. Yes, it's true that you pay mainly interest in the first few years of any mortgage.
On a $300,000 traditional mortgage at 6 percent, for example, only $3,684 of the $21,584 you pay in the first year goes toward principal. But that quickly adds up. You'd have built about $21,000 of equity in five years, $50,000 after 10 years.
"The attractive feature of amortization is that it's automatic and every month the savings go up," says Jack Guttentag, a Wharton professor who runs www.Mtgprofessor.com, a mortgage information Web site.
Of course, this torrid real estate market has seemingly eliminated the need to pay down equity. Many home buyers figure they can quickly reap huge equity gains simply by owning a house. An interest-only loan is a foot in the door.
posted by Hot Spot Homes at 1:57 PM
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