Interest Only Mortgages Lose Backing

Image Credit: HSH Associates via New York Times

Interest Only Mortgages

Remember a few years ago when everyone was trying to squeeze into an interest-only mortgage, figuring they’d make more money later or just sell before they had to start in on the principal? Well, Bob Tedeschi digs into the reality that interest-only mortgages are becoming a niche product once more.

Freddie Mac just announced they will stop backing interest-only mortgages. Michael Cosgrove, a Freddie Mac spokesman, said that at the end of 2009 close to 18% of their interest-only loans were at least 3 months delinquent. Put that up against only 7% of the rest of their loans. Fannie Mae is losing money on interest-only loans as well but still hasn’t officially pulled the plug.

It sounds like some smaller lenders will still make interest-only mortgages, but that they will be a lot more discerning. At this point a borrower with good credit can get a 4.5% initial rate fixed for 5 years with a maximum increase of 5% over the next 5 years- to get that rate, though, you need to prove you can pay the fully indexed rate.

For everyone who already has one of those interest only mortgages and needs to refinance, New York, New Jersey and Connecticut all have laws that restrict refinancing only to borrowers whose payments are going down or who are switching to a fixed-rate loan. With that said I cant imagine why someone would refinance in order to have their rate go up.

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