The word is that the recent housing tragedy supposedly swept away from the surface of the planet all the highly creative mortgage products that were roundly blamed for some of the ensuing trouble. At least one of them has survived, though, the Interest-Only one. In it, only the interest portion is paid, with nothing going to the principal. It is drawing only scant attention nowadays, but it’s still around, offered at least by Fannie Mae. Its guidelines in this post-crash real estate era are quite restrictive which obviously makes it out of reach and unattractive to most home loan borrowers.
Let’s snap on the seat belts and take a moment now to go over the Fannie Mae product's main elements. FRMs – fixed rate mortgage – could be 30- or 40-year loans with the interest-only – IO - period for 10 or 15 years. Whereas the ARM – adjustable rate mortgage – looks different and is a bit confusing. The loan duration is 30 years and has a fixed mortgage interest rate for the first 3 years or more, then an IO period of 10 years after which the rate adjusts annually.
The eligible property type is a 1-unit purchase or construction and limited cash-out transactions qualify for a primary residence or a second home. Barred transactions include 2-4 unit properties, investment properties and cash-out refinances.
Here come the deal busters for most borrowers who are considering going this route. The minimum FICO score is 720, LTV – loan-to-value – ratio stands at a mighty 70% and the home loan applicant needs to have 24 months worth of reserves. Especially these last three guidelines are clearly more intimidating than the easy ones mortgage lenders offered some years ago.
Interest-only mortgage product suits a narrow segment of the market. It does so today and did that before too, although its lenient qualifying criteria made it quite popular in the housing frenzy of yesteryear. It wouldn’t make much sense for a regular wage earner to seek to lower his payment using IO. It really would work for someone who has an irregular income, perhaps one based largely on commissions and/or bonuses. Or someone who trusts his income will increase nicely in the near future. Seasoned investors could benefit from it, too, by putting the savings from not paying principal into financial instruments to make money and see if they can come out ahead.