Federal Reserve Board Chairman Alan Greenspan, who earlier this month bemoaned mortgage gimmicks, would probably applaud lenders’ aversion to “interest-only” mortgages.
Fiery hot in some areas of the country, they haven’t caught on here.
“We don’t promote them or encourage them,” said Leighton Cooney of Maine Home Mortgage in Auburn and Portland.
“We don’t offer them,” echoed Debbie Bodwell, vice president of Homeowners Assistance Corp. in Auburn. “We do not do interest-only mortgages. They’re dangerous. People could lose their homes.”
While they may have a place in real estate markets where people tend to buy and sell homes quickly, Cooney noted interest-only mortgages have “a lot of risk.”
Debra Conrad, a loan officer with Rainbow Federal Credit Union, said her company also eschews such mortgages. “We don’t offer them,” she said flatly, adding that the lending companies that the credit union sells its mortgages to decline to offer such products.
How it works
With an interest-only loan, a borrower pays only the interest on the loan for the first five years, but then pays higher principal and interest charges for the remainder of the loan.
Claude Beaucage, Androscoggin Bank’s senior vice president for retail lending, says cost is the big reason why there’s not a lot of interest in them.
A $200,000 mortgage, Beaucage calculated, can cost a borrower $15,000 more in interest over the life of a 30-year interest-only loan at 6.5 percent.
For the first five years, they’d pay $1,083 each month instead of the $1,259 they’d pay with a conventional mortgage. But after that the monthly payment would jump to $1,346.
Over the life of the note, the borrower would repay a bit more than $470,000, instead of $455,085 for a conventional loan, Beaucage said.
“I suppose we could write them,” he said, “but to be honest with you no one has asked for one.”
Androscoggin Bank has written some interest-only home equity loans and two-year construction loans, but no interest-only mortgages for longer terms.
Popular elsewhere
Such loans are popular in Massachusetts, Beaucage and other lenders said.
That’s in part because the value of property there has doubled in the five years since 2000. And it’s also a market where people are buying homes then reselling them in a matter of two or three years, and making a profit doing so.
In Maine, the bankers said, property isn’t rising in value as rapidly and people tend to stay in their homes longer. Those two factors make interest-only mortgages a bad deal, they said.
The loans can also be advantageous for someone who anticipates significantly higher earnings in the near future and someone who gets large annual or semi-annual bonuses and uses that money to pay down the principal.
In Massachusetts, where the loans are more prevalent, they are finding some disfavor.
During the first four months of the year, the number of foreclosure filings there was 3,740, compared to 2,926 during the same period last year, a 27.8 percent increase, The Boston Globe reported last week.
Massachusetts Secretary of State William Galvin listed a variety of factors for the sharp increase, including high housing prices, lenders’ willingness to give gimmick loans without a major downpayment, and people’s desire to own something priced beyond their means.
“When you tie all these factors together … you have a recipe for disaster,” Galvin told the Globe.
Cooney said he sees no need to take a gamble with them.
“Traditional 15-, 20- and 30-year mortgages are such a good value right now” that very few people would fall into a category where they should even consider an interest-only loan.
He was offering mortgages at 5.375 percent interest for 15 years, and 5.625 percent for 30 years.
Interest-only might make sense “in overheated markets such as California,” Cooney said, but not in the Twin Cities, where the market remains largely affordable for most potential buyers.
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