The Inside Scoop On Interest-Only Loans

The Inside Scoop On Interest-Only Loans

Are They Good Or Bad For Borrowers?

Interest-only loans are designed to make the first years of mortgage payment easier on the borrower. For example, in a 30-year interest-only loan, the borrower might pay only the interest for the first ten years and then convert to paying principal for the last twenty. The loan would still be amortized at the end of the loan. Seems like a good deal, right?

These loans, however, were a major contributing factor to the housing market crash and the Great Recession. Borrowers were unable to make their higher payments when their loan converted, and were left defaulting on their mortgages. Why, then, are lenders bringing these seemingly risky loans back into consideration?

With greater requirements before a borrower is able to secure such a loan, lenders hope to protect the housing market and their  borrowers. For example, before the economic downturn these loans were approved based solely on the borrower’s ability to pay his or her interest. Today, they are approved based on the ability to pay interest and principal.

Furthermore, most borrowers who secure interest-only loans need to have a credit score in the mid- to high-700s or above, a debt-to-income ratio in the low 40 percent range or below, and put down a significant down payment. Lenders believe these requirements eliminate poorly qualified borrowers while allowing qualified borrowers access to the more flexible payment programs these loans offer.

Do you think an interest-only loan could be the key to getting into your dream home this year? Are you looking for guidance to help you understand the changing real estate and mortgage markets? Contact the Zwahlen Team, your trusted San Ramon Valley Realtors for all of your real estate needs in Danville and the surrounding cities.