Interest-only mortgages were identified among the culprits to blame for the mortgage market crash and financial crisis of a few years ago. In the aftermath, interest-only loans all but disappeared from the mortgage landscape.
Now, though, with some sectors of the economy recovering, Marketwatch reports that interest-only mortgages are starting to make a comeback.
What are Interest-Only Mortgages?
In the run-up to the financial crisis, interest-only mortgages were used as a financing technique to ensure that borrowers could pass muster when getting approval for a larger home loan. With an interest-only mortgage, the borrower pays only the interest during the first few years of the loan. This keeps payments fairly low, but it also prevents buyers from building equity in their homes by paying on the principal.
However, after the initial period is over, the borrower is required to begin paying on the principal. Many home buyers, who expected to be making more money by the time the interest-only period ended, found themselves unable to afford the terms as their hopes went unrealized.
Who’s Getting Interest-Only Mortgages Now?
Prior to the financial crisis, many of those getting interest-only mortgages were solidly middle class. Now, reports MarketWatch, interest-only mortgages are aimed more toward affluent borrowers. These are borrowers who might normally be able to afford the regular payment, but decide to put the money they save on mortgage payments toward other investments, particularly those that generate income.
Next year, new rules will go into place requiring mortgage lenders to evaluate ARM borrowers based on their ability to pay higher interest rates. Additionally, new rules will increase the foreclosure liability of lenders who continue to offer interest-only mortgages.