Interest-Only Loans Can Buy More House and More Trouble

They're spreading like wildfire--interest-only mortgages appear to be the panacea for rising home prices and the incomes that can't quite catch up. You can buy "more house" and have a low mortgage payment and a big tax deduction. Who wouldn't want one, right?

Well, a large number of consumers are getting into these loans when they shouldn't. Interest-only mortgages work well for some individuals and are dangerous for most others, yet the number of interest-only loans is rising rapidly.



Take a look at San Diego. In 2004 almost half of the mortgages required interest-only payments in the first few years according to a study done by LoanPerformance, a San Francisco--based real estate information service. Could this have something to do with the housing market? You bet it does. Are home prices rising faster than salaries and incomes? They sure are. So how is one supposed to afford a house in such an expensive housing market? You guessed it--an interest-only loan.



Interest only-loans were originally aimed at more sophisticated investors who wanted to leverage their income by re-directing what would have been the principal portion of their payment to higher yielding investments that exceed the rate of their home appreciation. These types of investors typically have more assets and financial discipline than most and therefore aren't as likely to get in as much trouble with such a loan.

Today, interest-only loans are being utilized by borrowers who are trying to leverage debt.



What they are doing is getting more debt for their buck; they're borrowing more money but keeping their payments low (initially) in order to compete with other buyers in sellers' markets. Here are some of the potential dangers that face such borrowers:

• If the principal balance isn't being reduced, than no equity is being built, and if home prices are stagnant during the interest-only period and the borrower needs to sell, he'll need to be able to pay sales costs out of whatever equity there is in the house, if there is any.



Remember, mortgage amortization is in the borrower's control, appreciation is not.

• If there's a downturn in home prices, the borrower could end up "upside down," meaning the mortgage balance on the property could end up being greater than the property's market value. In this case, the borrower would be responsible for sales costs and the remaining mortgage balance which could lead to foreclosure.

Interest-only mortgages make sense for borrowers:

• who have seasonal incomes or earn commissions and/or bonuses and have a desire to pay on the principal when it's convenient.



• upwardly mobile individuals who expect to earn more in a few years and want to buy "more house" early on rather than later.

• who intend on investing their cash flow in higher yielding investments or paying down high-priced debt.

Make sure you know what you're getting into with an interest-only loan. Consult with your mortgage broker or lender to know what the possible repercussions could be, and be sure you're getting the loan for the right reasons. Eventually, you want to own your home, and it's better to be planning on that sooner than later.



Brian Pollard is a loan officer for http://www.bendmortgagegroup.com, a mortgage company in Bend, Oregon. He is also the company's marketing coordinator. For more articles visit http://www.bendmortgagegroup.com/Articles.

Qualifying Criteria For Home Mortgage Refinancing and Loan Modification

Currently, the US Federal Government has produced a stimulus plan for home mortgage refinancing programs. These programs have been designed in order to help people who are about to have their homes foreclosed. This incentive program is primarily intended to help the American citizens who are having a struggle with their home mortgages. Unfortunately, it is not intended for helping people who have homes that are sitting empty.

There are two available options which can prove that the qualifying criteria for the stimulus packages are met.



The first option you can have is mortgage refinancing. This occurs when you have a current mortgage which is under, owned or has been guaranteed by either one of the two largest lending agencies which are Fannie Mae or Freddie Mac. Fannie Mae stands for Federal National Mortgage Association while Freddie Mac stands for Federal Home Mortgage Corporation. If you have an existing loan under one of these two agencies, it can be refinanced so you can take advantage of the lower interest rates.



But in order to do so, you must meet the qualifying criteria.

So that you can get a loan refinance, you must not have loan which is above 105% of the value of the house under discussion. Also, your payments need to be up to date. Lastly, your conditions have not changed up to a point that you cannot afford lower payments. This means that you still must have an income which can be sufficient to meet your payments.

The other option you can choose is a loan modification. This other option lets you simply change your current mortgage's terms by approaching the existing mortgage company your loan is under.



Also, you will need to meet the qualifying criteria they have required. Your whole payment including interest, insurance, and taxes must be more than 31% of the whole gross income you have. In addition, the mortgage should be on the principal family home which you are currently living in and using as your primary residence. The balance on your mortgage should also not be bigger than $729,750. Another criteria required is that the loan should have been gotten at the start of the year 2009 but not after January 1.



Lastly, you will need to make a modified payment for a trial period of up to three months so that you can prove to your lenders that you can pay the new deal.

Whatever option you choose to take, the important thing is you save your home. And through the help of a home mortgage refinancing or loan modification, your home can be saved.