Interest Only Loans…didn’t that get us in trouble last time?

Once blamed for our subprime mortgage crisis that we finally seem to be recovering from seem to be re-emerging.  Should we be concerned?

The good news is the product is changing somewhat, which may ease some of our fears about the product’s comeback.  With interest only loans, borrowers make monthly interest payments and pay nothing toward the principal for a set period of time.   That part stays the same – but those who can qualify will be different.  Banks are requiring much higher credit scores (up in the range of 740 or higher) and a down payment of at least 35%.  These loans are geared toward the wealthiest of borrowers and centered around the jumbo mortgage level.

A few years ago, in a time where realtors can recall homes selling in 48 hours, 100% financing and too many closing to keep up with, lenders were much more open with their qualifications for interest-only loans.  Back then, lenders would qualify a buyer for an interest only loan as long as they could make the payment on the interest alone.  Another qualification for today’s interest-only loans is that the borrower be qualified to make the principal plus interest payment, even though it’s only an interest-only payment.  These more stringent qualifications should make us feel a bit more at ease.

Rates for interest-only loans may also be a bit higher – about .25% higher.

While the interest-only loans keeps the payments low at first, after a certain period of time the payments jump radically.  Principal is added and it is amortized over a shorter amount of time.  And to boot the payment may be based on current interest rates and not the rate when the loan began!  Definitely something to consider before deciding this is the product for you!