Why Interest-Only Mortgages Are Not In All Consumers' Best Interest
Prospective homebuyers must be wary of the potential pitfalls of non-traditional mortgages
"For first time homebuyers, the temptation to buy a larger or more expensive home because monthly payments are lower during the initial years of the mortgage is a risky road to go down," said Director Lindstrom. "These buyers are not building equity and may find they can't meet the significant payment increases when these loans are re-priced. Worse yet, they may end-up owing more than the actual value of the home in our changing real estate market," emphasized Lindstrom.
A new brochure , "Interest-Only and Option ARMs: Are They Right for You?" will shortly be distributed to banks, credit unions, mortgage lenders and consumer groups and is currently available on the Office of Consumer Affairs website at www.mass.gov/consumer. The brochure was produced by the Massachusetts Division of Banks in collaboration with the Massachusetts Bankers Association, the Massachusetts Credit Union League, the Massachusetts Mortgage Association and the Massachusetts Mortgage Bankers Association.
"Consumers have the benefit of a wide variety of choices in financing a home, but the home buying process is also very complicated and prospective buyers should take the time to understand these non-traditional mortgage products. Getting our new brochure into the hands of these consumers is an important step in meeting that learning curve," said Banking Commissioner Steven Antonakes.
Interest-only loans are usually adjustable rate mortgages that permit borrowers to pay only the interest portion of their loan payments, rather than interest and principal for a specified term. Option ARMs allow borrowers to decide how much to pay from month to month for a specified term. Options include interest-only payments, minimum payments that do not include all interest due or a full principal and interest payment based on the remaining scheduled term of the loan. At the end of the interest-only term, these products are re-priced ("recast") and consumers make higher payments to cover both principal and interest.
So What Can Happen?
If a homebuyer obtained an Option ARM for $300,000 today with an initial interest rate of 6.3% (starting or "teaser" rates may be much lower), the borrower could make a minimum payment of as little as $1,035 per month. But this payment would not cover any principal and would not even cover all interest owed. At the end of the payment option term, the borrower would then owe $330,000, which would have to be repaid over the remaining 25 years of the loan. The new monthly payment could be as high as $2,612 per month. With uncertainty in future interest rates and home values, homeowners may find that they are unable to refinance into a more traditional mortgage.
House hunters…Do the Home Work…Be Realistic about Your Financial Portfolio!!!
Before purchasing or refinancing a home, consumers should comparison shop and evaluate loan rates and terms. First time homebuyers really need to be realistic about how much they can afford before buying a home. Using a nontraditional mortgage to buy a bigger or more expensive home than you can afford now may result in an inability to meet the payments in just a few years. All prospective homebuyers are encouraged to hire an attorney whenever they are purchasing or refinancing a home so that the terms and conditions of all mortgage documents are clear and understandable.
Consumers with additional questions regarding mortgage products should contact the Division of Banks' Consumer Hotline at (800) 495-BANK (2265), extension 501 or visit www.mass.gov/dob.