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New Mortgage Math

Interest-Only Mortgage 'Hot Right Now'

Interest-Only Loans Open Door for More Buyers

WGN-TV Show Notes - May 12, 2004

Interest-Only Loans Start to Gain Interest

Growing Interest: Home Buyers Pursue Interest-Only Loans to Stretch Finances

California Refinance Of Foster Home With Pay Option Mortgage

Buyers Turn To Creative Financing for Homes

12 Ways to Save on Homeowners Insurance

Miracle Mortgage

Most I/O Borrowers Also Paying Part of Principle

New Mortgage Math; Interest only loans appeal to entrepreneurs.

October 1, 2004

By Jeanne Lee with FSB

You've probably heard the old advice about paying off your home faster by adding a little extra to each month's mortgage payment. For some small-business owners, a contrary strategy could make sense--lowering your house payments through an interest-only mortgage and freeing up cash for other needs, such as equipment for a growing business.

Jeff Chapdelaine, owner of a mortgage company and several rental homes in Colorado Springs, is trying the interest-only approach for the $ 175,000 home he and his wife bought in June. For at least the first five years, he'll pay only the interest due on a $ 150,000, 30-year adjustable-rate mortgage: $ 656 a month. That's nearly 21% lower ($ 172 a month) than what he would pay on a standard amortized loan. Chapdelaine, 43, will funnel that extra cash toward payments on another house, which he will rent out for income. In the sixth year the payments on his residence are scheduled to rise sharply to include principal. But Chapdelaine predicts, based on housing-price dynamics in his neighborhood, that the house will have appreciated by then and he will be ready to sell. "If I'm only going to live there for a few years, I'd rather have more money available to me--it's more cash flow to pay for a rental," he says.

Interest-only mortgages--which, like Chapdelaine's, typically convert to standard principal-and-interest loans after a few years--were relatively rare until recently. But consumers have become savvier about all the flavors of mortgages during the recent housing and refinancing boom. While no one tracks exact numbers, lenders at companies such as Merrill Lynch Credit Corp. and Washington Mutual report a surge in interest-only loans over the past two years.

Such a loan works well for established business owners who have inconsistent cash flow because "it allows them to pay principal when they choose or take the money they would have put toward principal and use it for their business," says Susan Freese, vice president of marketing at Merrill Lynch Credit Corp.

Both fixed-rate and adjustable-rate mortgages can be set up to require only interest payments, but expect to pay a rate about one-eighth to one-fourth of a percentage point higher than you would for standard loans. That covers the additional risk that the lender is taking on, because you're not building up any equity in the property. Also, if you're intermingling the balance sheets of your home and business, as many sole proprietors do, tread carefully. "If the business suffers a reversal, not only the business but your residence is at risk," says Doug Duncan, chief economist at Mortgage Bankers Association. While Chapdelaine strongly believes his property values will appreciate, he says he will keep a cushion of $ 70,000 in the bank and will refinance if he decides to stay in the house longer than five years.

Interest-only loans are probably a bad idea if you plan to keep your house forever, are close to retirement, or live in a neighborhood where home prices look likely to stagnate or decline. They're best suited to homebuyers who are sure they're going to move or are expecting to make more money before the interest-only period expires.

Interest-Only Mortgage 'Hot Right Now'

Saturday, July 31, 2004

By CHET CURRIER BLOOMBERG NEWS

If you smell something burning around a house nowadays, it might be the owner's fancy new interest-only mortgage.

Interest-only mortgages "are incredibly hot right now," says a mortgage-banker quoted in the Baltimore Sun. They are "the hottest items on the real estate market," says the Web site of the USC Credit Union at the University of Southern California.

When handling hot stuff, you have to be careful. "A new form of mortgage -- no money down and interest-only payments for years -- is converting homeownership from a solid investment into a dangerous gamble," warns The Sacramento (Calif.) Bee in a recent editorial.

The admonition is appropriate, and not to be taken lightly. Yet it represents only one side of the story. In their many potential uses, interest-only mortgages may be a lot like fire itself -- the proverbial wonderful servant as well as a terrible master.

Fixed mortgages for 25 or 30 years may have been all that anybody needed in an era of one-size-fits-all passbook savings accounts, evening newspapers and two-tone cars with tail fins. Today's more complicated world begs for a broader range of choices.

In the last generation or so, the whole realm of housing finance has changed radically on the lending side. Thanks to such innovations as marketable securities wrapped around bundles of mortgages that can be bought and sold like bonds, the pool of money to finance home-ownership has been vastly expanded and deepened.

A regular housing-cycle feature of the not-so-good old days -- spells of tight money when mortgages were scarce or even unavailable -- is now a memory.

Modernization on the lending side argues for more sophisticated choices on the borrowing side too. The USC Credit Union gives the hypothetical example of a $150,000 mortgage that would require monthly payments of about $1,000 a month on a traditional mortgage, or about $695 on an interest-only loan.

By opting for the interest-only mortgage, the borrower may be able to buy a better house. Alternatively, the extra money can be invested elsewhere or used to pay other, higher-cost debts. Or it can be paid toward the mortgage principal as the borrower sees fit, rather than according to the kind of set schedule mandated by a fixed loan. Someone who would otherwise pile different forms of debt on top of a conventional mortgage might find carrying the whole load easier, cheaper and possibly even less risky with interest-only financing.

At the USC Credit Union, the Web site says, "the interest-only period of your mortgage will be five, seven or 10 years, whichever you choose. After that it converts to a fully amortized adjustable-rate mortgage for the balance of the 30-year term."

Potential pitfalls? Oh yes. The timing of the current surge of enthusiasm for interest-only loans is more than a little scary, coming after a powerful and sustained home-price advance in many markets. Quite possibly the new popularity of interest-only deals has pumped some extra air into what some call a housing bubble.

"We think real estate is clearly an overvalued asset class, by perhaps 20 percent on a national average," say analysts at the Boston money manager Putnam Investments.

"We estimate that house prices in the U.S., U.K. and Australia are overvalued by 10 percent, 15 percent and 29 percent, respectively, at today's level of mortgage rates," say economists at Goldman, Sachs & Co.

Interest rates may well rise from today's level, complicating matters for borrowers who don't have fixed loans. Whatever happens, it's foolhardy to assume that house-price appreciation must continue indefinitely.

In all circumstances, home prices can keep rising only as long as there are new buyers able and willing to pay more than the last one did. Recall the tale of the penny-stock speculator who entered a sell order with his broker, only to have the broker reply "to whom?"

Borrowers who want to use an interest-only mortgage to best advantage must be ready to welcome one more complication into their lives. I've talked with people who chose a conventional fixed mortgage over an interest-only loan merely for simplicity's sake.

The deciding factor, as in many investment choices, may be what your first priority is -- to live better during the day or to sleep easier at night.

However any mortgage borrower answers that question, it's good to have the choice.  

Interest-Only Loans Open Door for More Buyers

Catherine Reagor-Burrough The Arizona
Republic Mar. 7, 2004 12:00 AM

More home buyers are betting on steady appreciation gains and opting for interest-only mortgages.

The home loans, until recently marketed only to high-income, investment-savvy borrowers, let borrowers pay only interest payments for at least the first several years.

That keeps monthly payments low and allows people to put money into other investments or wait for the home's value to rise so they can sell for a profit.

"Interest-only loans have opened the door for a lot more home buyers and investors," said R.J. Crosby of CTX Mortgage.

Most people can qualify for a bigger loan amount because the payments are lower on interest-only loans.

For example, a borrower who can afford a monthly mortgage payment of about $1,200 would qualify for a $250,000, adjustable rate mortgage with a 4 percent interest rate.

The same person could borrow nearly $350,000 with an interest-only loan.

These loans are particularly popular with people who plan to sell in a few years or take advantage of big appreciation gains and refinance. But people must remember that if they keep the house, the principal eventually has to be repaid.

For example, on an interest-only, 5-year adjustable loan, the buyer pays only interest payments for the first five years.

After that the interest rate changes according to the formula set in the loan document.

Then the monthly payment increases to include the amortization of the balance of the loan and the interest.

That means, according to mortgage experts, that the principal balance is compressed, and the borrower pays it over 25 years instead of 30 years.

Interest-only loans are also popular with people who get a large portion of their income in commissions or bonuses once a year. They are also particularly popular in the Valley with people buying luxury homes, who invest money they would have paid toward their principle into either other homes or stocks and bonds.

They can buy more house, keep their payments low and pay a chunk of principal when they have more cash.

Dave Herpers, director of Consumer Affairs for Amerisave Mortgage, said people who can carefully control their spending could end up financially ahead of someone paying off a 30-year mortgage.

His theory is if a borrower uses extra money to pay off the principal or invest in a mutual fund, or a combination of both, they can save tens of thousands of dollars.

For example, take a look at 30-year fixed rate loan at 6 percent carrying a monthly mortgage payment of $2,000.

A comparable interest-only loan would be about 3 percent and have a $1,000 monthly payment.

If borrowers were to put $500 of the savings toward principal each month and invest the other $500 in a mutual fund earning 8 percent, they would make almost $20,000 in a decade.

Still, some critics of the non-conventional loan say the mortgages prohibit people from building equity in their homes. However, during the past decade, most homeowners have built through appreciation and not by paying down a mortgage.

WGN-TV Show Notes - May 12, 2004

What if you could cut your mortgage payment by a third or a half? You could if you used an interest-only loan.

But is that the smartest move you can make? Everyone wants to save money, but there are only so many places you can cut your budget. And at the same time, everyone wants to buy a big house. Are interest-only mortgages the answer? Wtih an interest-only loan you might be able to have your cake and eat it in your big kitchen too.

Unless you've got hundreds of thousands of bucks hidden in your mattress, you'll need a mortgage when you purchase your home. Each payment is part principal and part interest. But what would happen if your entire payment was principal? You could buy a much bigger house or....

"With most interest-only mortgages, you can cut your payment in half and that's sizable," says David Herpers, Amerisave Mortgage.

But an interest-only mortgage doesn't stay that way forever. With most interest-only mortgages, you start paying down principal at year 10.

"If you haven't sold the property at year 10, you're going to amortize the loan over 20 years. So your payment will be substantially higher starting at year 10," Herpers says.

How high? As much as 30 percent higher. And what happens if interest rates rise? Rates aare at 40-year lows now, but if the interest rate on your loan rises from 5 percent to 8 percent, your monthly payment will shoot up another 40 percent. If your property doesn't appreciate in value, you could lose a substantial amount of money if you have to sell quickly for some reason.

That's the bad news. But if you're good with managing your money and believe your property will appreciate, you could do a lot with the money you'd save on an interest-only loan.

You could use the savings to prepay your mortgage, fix up your house, set aside money for your children's college tuition, as well as your own retirement. If you're on a seasonal income, or if you work on commission, you might find the lower monthly payments helpful when budgeting.

Just remember an interest only loan isn't for everyone.

"We as mortgage brokers and lenders have to be careful that we're not steering customers into these products that aren't ready," Herpers says.

Interest-Only Loans Start to Gain Interest

By RAY A. SMITH
Staff Reporter of The Wall Street Journal Online

Interest-only loans are gaining interest among commercial real-estate investors.

These are mortgages where the borrower pays only the interest in monthly payments for some fixed period. At the end of the period, the borrower will either start making principal plus interest payments or refinance the loan. These loans allow borrowers to hold on to more cash for a few years because they are only paying the interest on the loan.

Interest-only loans have long been offered in the residential real-estate market. And banks have been increasingly pushing them to home buyers as home prices have surged. Now, lenders are pushing them to commercial real-estate borrowers with more frequency as well.

In a climate where strong demand for commercial properties in many markets has pushed prices up and returns on investment down, interest-only loans "mean higher cash flow for the borrower," says John H. Pelusi Jr., an executive managing director and managing member in the Pittsburgh office of Holliday Fenoglio Fowler LP, a Houston-based real-estate investment banking firm.

Adds Howard L. Michaels, chairman of Carlton Group Ltd., a New York-based mortgage broker: "There's so much [money] out there chasing real estate, so lenders are aggressively bidding to put loans on quality real estate" in an effort to differentiate themselves from the competition in order to get more customers.

Some lenders' eagerness to expand interest-only loans can help small investors in particular. Small investors can qualify for larger loans to buy properties, including bigger properties, because the monthly payments they would owe are lower, and more manageable in the eyes of the lender.

In the past, interest-only loans tended to be granted to borrowers taking out loans that were 50% to 60% of the property's value, with the borrower having to put a significant equity stake in the property. More recently, lenders are offering these deals on loans in which they are willing to provide 70% to 80% of the mortgage financing.

Mark Fisher, a senior director with New York-based mortgage brokerage firm L.J. Melody & Co., a unit of CB Richard Ellis of Los Angeles, says some lenders will offer interest-only for the entire length of the loan, not just part of it, on deals in which the loan-to-value ratio is less than 65%, meaning that the loan is less than 65% of the property's value.

But interest-only loans can come back to haunt a borrower if the value of property he or she purchases falls. The borrower can ultimately wind up owing more than the property is worth. Say an investor buys a property for $12 million with a $10 million interest-only loan. If the property declines in value or doesn't perform as expected, and, as a result, is only worth $10 million when the loan becomes due, the "$2 million is gone," says Mr. Pelusi, as the investor will still owe $10 million to the lender.

Another downside: Borrowers don't build up any equity from the property during the interest-only period.

These loans sometimes command a higher interest rate. And some interest-only loans are floating-rate or variable, meaning the interest rate can rise and fall every month depending on market conditions. There's also risk that if the borrower's financial situation changes for the worse he or she may not have saved enough to be able to manage paying the higher mortgage payment when the principal and interest payments kick in.