It has been over 10 years since the housing market collapsed in 2008. Back then, risky mortgages to low-credit score borrowers with no down payment were the norm. Those days are gone along with those risky sub-prime loans. Today’s mortgage environment is regulated, and credit requirements are arguably the tightest they have ever been — the average homebuyer last year had an average 724 FICO score, according to Ellie Mae. This at a time when housing inventory is at historically low levels. As demand for housing continues to outpace availability causing prices to rise ever higher, buyers are seeking mortgage alternatives. The staid 30-year fixed mortgage isn’t for everyone. For high net worth borrowers, or those with fluctuating income, there’s an old option made new again, the interest-only mortgage.
Don’t get it twisted, today’s interest-only mortgage is not what it used to be. The days of stated-income and No-doc loans are gone, probably forever. These days, the interest-only mortgage is fully disclosed and underwritten meaning the borrower must provide verifiable assets and income to qualify, said Leora Ruzin, vice president of secondary marketing at Guaranteed Rate, one of the largest mortgage brokerages in the country. To qualify, borrowers need to prove that they can make the full payment PITI, that’s “mortgage speak” for principal, interest, taxes and insurance even though they will initially only pay interest. Of course, the homeowner is also responsible for property taxes and homeowners insurance. But, for a set period of time, say three to 10 years, the borrower only pays interest on the mortgage. When the interest-only period expires, they could make one large payment to pay off the loan, refinance, or start making the larger payments.
Today’s interest-only mortgage is not a subprime product, said Ruzin. “Because of strict underwriting procedures, much of the risk has been mitigated and only a sliver of applicants will be accepted.” It’s not for everyone. It’s for those who may not have W2 income. Maybe they’re small business owners, doctors in the early stages of their career or musicians who’ve had some success but haven’t realized their full potential earning power just yet.