Interest Only Loans Partners

Interest-Only Loans Open Door For More Buyers
Catherine Reagor-Burrough
The Arizona Republic
Mar. 7, 2004 12:00 AM

More home buyers are betting on steady appreciation gains and opting for interest-only mortgages.

The home loans, until recently marketed only to high-income, investment-savvy borrowers, let borrowers pay only interest payments for at least the first several years.

That keeps monthly payments low and allows people to put money into other investments or wait for the home's value to rise so they can sell for a profit.

"Interest-only loans have opened the door for a lot more home buyers and investors," said R.J. Crosby of CTX Mortgage.

Most people can qualify for a bigger loan amount because the payments are lower on interest-only loans.

For example, a borrower who can afford a monthly mortgage payment of about $1,200 would qualify for a $250,000, adjustable rate mortgage with a 4 percent interest rate.

The same person could borrow nearly $350,000 with an interest-only loan.

These loans are particularly popular with people who plan to sell in a few years or take advantage of big appreciation gains and refinance. But people must remember that if they keep the house, the principal eventually has to be repaid.

For example, on an interest-only, 5-year adjustable loan, the buyer pays only interest payments for the first five years.

After that the interest rate changes according to the formula set in the loan document.

Then the monthly payment increases to include the amortization of the balance of the loan and the interest.

That means, according to mortgage experts, that the principal balance is compressed, and the borrower pays it over 25 years instead of 30 years.

Interest-only loans are also popular with people who get a large portion of their income in commissions or bonuses once a year. They are also particularly popular in the Valley with people buying luxury homes, who invest money they would have paid toward their principle into either other homes or stocks and bonds.

They can buy more house, keep their payments low and pay a chunk of principal when they have more cash.
Dave Herpers, director of Consumer Affairs for Amerisave Mortgage, said people who can carefully control their spending could end up financially ahead of someone paying off a 30-year mortgage.

His theory is if a borrower uses extra money to pay off the principal or invest in a mutual fund, or a combination of both, they can save tens of thousands of dollars.

For example, take a look at 30-year fixed rate loan at 6 percent carrying a monthly mortgage payment of $2,000.

A comparable interest-only loan would be about 3 percent and have a $1,000 monthly payment.

If borrowers were to put $500 of the savings toward principal each month and invest the other $500 in a mutual fund earning 8 percent, they would make almost $20,000 in a decade.

Still, some critics of the non-conventional loan say the mortgages prohibit people from building equity in their homes. However, during the past decade, most homeowners have built through appreciation and not by paying down a mortgage.