By Troy Corman, t2 Real Estate
While cash purchases of homes has picked up dramatically over the last two years, surprisingly, many wealthy home buyers are now turning to interest-only home loans. The main attraction of jumbo interest-only loans are lower monthly payments.
The big drawback for borrowers is that interest-only mortgages do not allow for any equity capture. The entire monthly payment just pays the interest tab and doesn’t chip away at any of the principal amount owed.
Experts believe one reason that interest-only jumbo loans are in vogue today is because many of the wealthy receive large bonuses or the majority of their income at one particular time of the year. Also, interest-only jumbo loans allow borrowers to make extra payments toward the principal – usually without penalty.
Jumbo home loan lender Everbank stated that interest-only jumbo loans now account for 15% to 20% of all of it’s private jumbo mortgages. Bank of New York Mellon’s states that it’s jumbo interest-only loans have jumped 50% versus a year ago. Others getting started in the jumbo interest-only loan business include home lender, Stonegate Mortgage Corp.
A catalyst for the increased interest may be the new rules starting in 2014 which will make it more difficult for home buyers to qualify for adjustable-rate mortgages. The Consumer Financial Protection Bureau will require lenders to evaluate borrowers ability to pay interest rates higher than their introductory ARM interest rate. Expect many borrowers to qualify for a smaller mortgage or loan amount as a result. Lenders and borrowers both seem to be turning to the interest-only loan in advance of the upcoming ARM regulation. Plus, borrowers like the fixed interest rate.
The monthly savings on an interest-only jumbo loan is substantial. On a $1 million mortgage, a jumbo loan rate of 3.75% would equate to a monthly principal and interest payment of $4,625. An interest-only loan would come out to about $3,400 monthly.
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