Real Estate

Interest-only Mortgages Are Back


CNBC has informed borrowers that Michigan-based United Wholesale Mortgage, the second-largest lender through brokers in the country, announced that they are offering interest-only loans through brokers, but with important safeguards. These safeguards include; the borrower must put 20 percent down, ensuring that they have the “skin in the game” that many did not during the housing boom, they must have at least a 720 FICO credit score (well above average), and they must qualify on what the payments will be once they’re adjusted higher, not at the starter rate.

These safeguards assure that the people with these mortgages can afford them and that there is less risk: “These people can afford these mortgages. They’re savvy homeowners,” said Ishbia (President and CEO of Michigan-based United Wholesale Mortgage). “We’re giving them the choice. It is no more risk to us. We actually think it’s less risk.”

United Wholesale Mortgage does not hold the loans, but sells them to investors.

The article explains interest-only mortgages: “The mortgage begins as a five-year adjustable-rate product. Without paying principal, a borrower using, for example, a $300,000 mortgage, would start at 4.125 percent today, the same as a 30-year fixed. Without paying principal, however, the borrower would save $420 per month.”

“The interest rate can then adjust higher after five years, depending on market rates, but borrowers for this product are underwritten at a rate above 6 percent to ensure they could handle that adjustment. Borrowers are also required to start making principal payments after 10 years; of course they can also refinance the loan whenever they want.”

During the housing boom, these mortgages were used to help borrowers buy homes they couldn’t exactly afford. More lenders are starting to use them again and with tighter restrictions. They are mainly offered to high net worth individuals in the jumbo loan category, and banks hold the loans on their balance sheets.

This proposal made by United Wholesale Mortgage is designed to offer the product to a broader group of consumers through brokers. Consumer watchdogs are worried that with a wider group they will be used more for refinances, which could be an issue, due to how quickly home prices are increasing lately.

For the full article on interest-only mortgages, click here.