interest-only a deception

Guest 0.10 Dollars($)

When mortgage lenders push interest-only loans to first-time buyers, which seems to be the trend these days, is this a form of deception to get naive people to choose a loan that earns the lenders more interest, or is this really a good way for these types of borrowers to become homeowners?

sara

Hi Guest,

Welcome to the forums.

It depends actually on the financial strength of the borrower who is taking out an interest-only mortgage. Usually lenders consider a borrowers financial ability to deal with a home loan, his credit score, his payment history and various other factors before approving the loan.

However, the industry does come across cases where lenders have convinced people to get interest-only loans with the aim to earn more money.

If you are interested in managing an interest-only loan, let me know about your financial situation, off course the minimum details that you can let others know and your credit score. I can just try to give you some suggestions on the basis of that.

Thanks,

Sara

wablola · Posted: Mon Jan 22, 2007 8:51 am Post subject:

Interest Only Mortgages has it's place. If the borrow is money savy, interest only can actually benefit the borrower.

Let's say for example borrower receives a 30 yr fix interest only loan at 5.99%. The borrower thinks he can beat the 5.99% interest on an investment vehicle such as a mutual fund where it gains compounding interest at 10%. The borrower keeps contributing to the mutual fund with the compounding interest which beats the loan at 5.99%. Let's say in 10 years the borrower decides to take all the money from the mutual fund and use that money to pay down the principle of the 30 yr fix interest only loan. The money pulled from the mutual fund is does not get the capital gains tax since it is going to pay down the loan. Win-Win situation.

kenstampe · Posted: Mon Jan 22, 2007 3:57 pm Post subject:

I don't believe lenders push first-time homebuyers specifically into interest only loans. This was a common myth a few years ago when these loans were first introduced and were only available through non-conventional channels. The complaint was that the buyer was qualifying on JUST the interest only payment and so was being encouraged to purchase more home than they really could afford.

Since the GSEs (Fannie Mae & Freddie Mac) introduced their interest only programs most require the buyer qualify at the higher principal + interest payment. The strategy behind an interest only loan is either to reduce monthly payments so the homeowner can invest the difference or to reduce the minimum monthly payment to keep the loan on time for a borrower with unstable income such as commission only or self-employed.

That said, there isn't anything unique about putting a first time buyer into an interest only loan unless one of those strategies is employed.

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