Just thinking about an interest-only mortgage conjures up bad memories from the past. But the devil is in the details and today’s interest-only loan products that are becoming available from several mortgage lenders are very different than its predecessor. It may have the same name, but that is where the similarity ends.
Today’s new interest-only mortgage products are really an adjustable rate mortgage (ARM) loan that delays making principle payments for up to ten years. Then it becomes a standard fixed-rate mortgage for the remaining term of the loan. So, it is interest-only just for the first few years of the loan. Also, there could be a hefty jump in the interest rate during the adjustable portion of the loan requiring borrowers to financially plan for the transition into making higher loan payments even before they begin paying down the principle.
Although interest-only mortgages are not considered a Qualified Mortgage and thus are not subject to government loan guarantees, expect qualifying for interest-only mortgage loans to be more stringent since the lender will be carrying the loan on its books. For instance, United Wholesale Mortgage requires borrowers to qualify for the mortgage based on the higher fixed-rate portion of the loan, not the interest-only portion as was the case in the past. “The purpose of the program is not to enable a consumer to afford a larger house; it’s for savvy borrowers who can regularly afford a house on a 30-year fixed mortgage, but choose the interest-only option to save additional discretionary income,” said Mat Ishbia, CEO, United Wholesale Mortgage.
Minimum Qualification Requirements for Interest-Only Mortgages
- Minimum 20% down payment required.
- A 720+ FICO® Score.
- Must be able to afford the higher post-adjusted monthly mortgage payment.
Still, having a variety of competitive mortgage products is good for consumers. And one of the many Realtor® jobs is to understand the variety of mortgage products that are available in the marketplace in order to refer clients as appropriate to mortgage brokers that will be able to provide them with the best loan products that are most suitable for their financial situation.
photo credit: mortgage document via photopin (license)
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