Resurrected Interest Only Mortgages
Who said that the mortgage market couldn’t duplicate pre-2008? What about betting on interest only? That’s right, companies have resurrected interest only mortgages. And interest only options for a mortgage have expanded. Look at our checklist of pre-2008 like repetition in our post on Wacky Politicians. You can now add a new bullet to the 2008-like risks in that post:
Interest Only Option – Check
What’s one more item in the checklist of pre-2008 issues that led to the melt down? Let’s just keep adding them one at a time so no one notices that we’re back in 2008.
Some lenders at times have offered loans with a partial interest only feature. These are non-QM (non Qualifying Mortgage) loans. Read our post on QM Loans to learn more on what QM means. United Mortgage Wholesale just rolled out a new product which provides for payments of interest only, no principal, for up to 10 years for some high dollar loans. Of course the specific high dollar amount, LTV and DTI requirements won’t allow these loans to the majority of borrowers. Yet.
An Example
Let’s use a $700,000 mortgage for most of the US. A loan at 3.5% on a 30 year amortization schedule would require payments of $3,143 per month just for principal and interest. The new product might let the borrower pay only $2,041 per month in interest and no principal for the first 10 years. The next 20 years would be at $4,059 if the interest rate remained at 3.5%. Of course, if rates are generally favorable, the borrower would refinance instead of seeing the payment requirement double. That is, if interest rates cooperated in that 10th year. And the borrowers situation on income and debt hasn’t changed.
During this time, the borrower builds up no equity in the home. It’s like leasing a car, except the car depreciates and the mortgage borrower hopes for appreciation. In the pre-2008 period, borrowers used this type of loan as a higher leveraged bet – a stock option like bet on appreciation. Unfortunately, in 2008, the bet went horribly wrong. Will that be the case in 2022 with resurrected interest only mortgages?
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