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Most I/O Borrowers Also Paying Part of Principle

Most I/O Borrowers Also Paying Part of Principle

By Steve Kerch, REAL ESTATE EDITOR
Real Estate Weekly - CBS Marketwatch
October 28, 2005

http://www.marketwatch.com

So far, so good: That's the message from a new survey of the behavior of those who hold what are considered risky interest-only mortgages.

Wells Fargo this week surveyed borrowers with interest-only loans and found that, at this juncture, most are paying at least some principal some of the time, a prudent financial strategy that suggests many such borrowers may not be stretched to their absolute limits by their home purchase. That doesn't mean there is no reason to worry about interest-only loans, or a few other creative financing products that allow for smaller payments, sometimes at the expense of having your principal balance grow each month. Many of these loans are new, meaning the real trouble may still lie a year or two down the road. Homeowners, especially first-time buyers, tend to have their finances in pretty good shape when they head into the mortgage office. They have usually paid down debt and amassed some savings in order to bolster their chances of getting a good rate on their loan, or of getting a loan at all. That good behavior often carries over into the early years of a loan. But people being people, temptations always lurk. Credit cards that got paid off may get built up again as paint, carpeting and furniture purchases for the new house roll in over several months. Vacations denied while saving for a down payment may seem safe to take again. A new, more expensive car sure can look good in the new driveway. And that is why mortgages tend to wind up in default, if they are going to wind up in default, two or three years in. It takes about that long to unwind your good financial deeds to the point the mortgage becomes a struggle. Of course, there are other reasons loans go belly up -- divorce, medical problems and job loss chief among them -- that can happen at any point in the life of a mortgage. The real worry with the current round of creative mortgages is that they are, for the most part, adjustable-rate loans that are going to adjust in what may be a much higher interest-rate environment. Especially at the initial adjustment, the payment shock may be too much for even those who are financially well-behaved to handle. The good news there is that while rates are rising, they are not rising too far or too fast. In fact, economists with the Mortgage Bankers Association expect the 30-year loan to hit 6.7% by the middle of next year, then level off through 2007 into 2008. That may not be quite the picnic that 5.25% mortgages were at the lows, but it isn't likely to create a downpour of misery either.