Fixed-Rate, Interest-Only Florida Home Loans Experiencing Surge In Popularity As Of Late

As rising Florida home loan costs make buying a home more and more difficult, demand has soared for fixed-rate, interest-only mortgages, according to the Wall Street Journal.

This recently-introduced type of mortgage offers the security of a fixed rate, but the relatively low monthly payments in the loan’s early years that appeal to cash-strapped buyers in today’s financial environment.

Fixed-rate interest-only mortgages allow borrowers to lock in to Florida home loan rates for the duration. All the while, they will reduce their monthly costs by paying interest and no principal. This typically occurs during the first 10-15 years of a 30-year loan. These Florida home loan options, which barely existed two years ago, now account for roughly 8 percent of all new residential mortgages, says financial services firm UBS AG.

The growing demand for them illustrates the adjustments applicants are making as Florida home loan rates have climbed to their highest levels in four years and the gap between short- and long-term interest rates has narrowed. Rates on 30-year fixed-rate mortgages currently average 6.56 percent, according to the Mortgage Bankers Association. Adjustable-rate mortgages, which many have long relied on to lower monthly payments, have climbed even more sharply.

Major U.S. lenders are taking advantage of this new demand.

• U.S. Bancorp added fixed-rate interest-only mortgages to its product lineup in September, with the loans now accounting for 8 percent of the bank’s new home loans. Volume for the product is growing every month, reports the Minneapolis-based lender.
• In February, Bank of America began offering a 30-year fixed-rate mortgage with a 10-year interest-only period. It also added a 40-year Florida mortgage that is interest-only for the first 10 years.
• Quicken Loans, an online home loan lender, reports higher demand for its “Smart30″ fixed-rate interest-only mortgage in recent months. The company’s chief economist, Bob Walters, says it’s exploded and become Quicken Loans’ most popular program.
• Originations of fixed-rate interest-only loans at GMAC Mortgage, a unit of General Motors Corp., increased fivefold between December and February, with first-time home buyers the biggest customers for the product.

But these Florida home loan opportunities have significant drawbacks, namely the fact that borrowers do not build any home equity, aside from any rise in property values. Homeowners will also be hit with drastically higher payments once the interest-only period ends. Payments in the home loan’s later years include both interest and principal (in other words, the full PITI), and the balances must be paid off.

Moreover, the savings aren’t as great as you might imagine, as fixed-rate interest-only loans typically go for 0.125-0.375 percent more than the rate of a standard 30-year fixed-rate mortgage. For instance, a $300,000 standard 30-year fixed-rate loan with a 6.62 percent rate would have a monthly payment of $1,920, while an interest-only mortgage with a 6.75 percent rate would cost you $1,687 a month, according to HSH Associates. But that bill could jump 35 percent to $2,281 a month when the interest-only period ends in 10 years if you don’t sell the house or refinance.

Greg McBride, a senior financial analyst with Bankrate.com, says that in order to reduce payment shock, borrowers who take out these Florida home loans should try to make principal payments as often as they can. As you pay down the principal, the required interest-only loan payment is reduced to reflect the lower remaining balance. According to UBS, borrowers with these Florida home loans tend to finance more of their home’s value and were more likely to have a second mortgage.

Some analysts say, however, that the savings from taking out a fixed-rate interest-only loan will diminish as mortgage rates rise. Because at higher interest rates, more of your payment goes toward paying interest rather than principal. Mortgage analysts still say that fixed-rate interest-only loans are less risky than other types of interest-only mortgages, for the interest-only period lasts for a decade. Chances are good that people will move or see their incomes grow before the payment resets.

The fixed-rate interest-only loan is the latest in a long line of mortgage products designed to boost housing affordability. Borrowers have embraced interest-only adjustable-rate mortgages in recent years, along with option ARMs that carry teaser rates of as low as 1 percent but lead to a rising loan balance later on. Then there are so-called piggyback loans that allow buyers to finance up to 100 percent of a home’s purchase price. Such home loans have fueled the recent South Florida real estate boom.

All good things must come to an end, however. With Florida home loan rates and foreclosures on the rise, regulators are weighing new rules designed to rein in the use of nontraditional mortgage products that may pose risks to both borrowers and lenders. Be sure if you apply for a Florida home loan that you understand the risks and benefits of non-traditional options. If it sounds too good to be true, it probably is.