Interest Only Mortgages

There are those who say that interest-only mortgages are the main reason for the housing market’s problems in recent years. Loans were given fast and loose, with many home buyers barely qualifying for the interest portion, never mind the principal when it was added in.

Still, interest-only mortgage loans are still out there, and home buyers will sign up for them. On paper, an interest-only mortgage looks enticing: The first years offer a significantly lower monthly payment, especially if you’re only going to keep your home for a few years.

But Freddie Mac might think there are clouds on the horizon.

Freddie Mac (the Federal Home Loan Mortgage Corporation) was charted by Congress in 1970 as a means of providing stability in residential mortgage markets, especially for low and moderate income home buyers. It props up the market by providing capital to lenders.

It can be taken as something of a warning that Freddie Mac recently announced that later this year (September) it will stop purchasing interest-only mortgages. Not only will there be fewer choices in obtaining a mortgage, the message itself is rather grim. Part of the decision, it seems, is that while Freddie Mac saw an increase in defaulted and delinquent mortgages during the past few years, the decision to end those mortgages completely seems to say that it doesn’t see a light at the end of the tunnel — and is bailing out completely.

That’s not to say home buyers won’t be able to get an interest-only loan, just that it will be tougher to find. Getting a loan is likely to be difficult, but not impossible, with borrowers needing to qualify at the full (interest plus principal) mortgage amount.

Also of Interest Reverse Mortgages: Possible Answer for Struggling Seniors

There are other types of mortgages to consider:

Fixed-rate mortgage. These are the safest mortgages because your monthly payment will be stable for the life of the loan. The only things that could go up are the insurance and property-tax portions. With insurance, you have the opportunity to shop around.

Biweekly mortgages. You make half of your mortgage payment every two weeks. At the end of the year, you will have made 13 months’ of payments instead of 12. The mortgage gets paid off earlier because of the extra payment each year.

Before you decide on an interest-only mortgage, run the numbers and see what they look like. You might want to also consult with your tax accountant or CPA before going the interest only mortgage route.