INTEREST ONLY LOANS — ARE THEY FOR REAL?

Prior to my position as First Vice President at Bayview Financial Exchange Services, LLC, I practiced real estate law.  As a real estate attorney, I was always concerned about what was happening in the real estate mortgage market, along with the types of loans, their availability and costs associated thereto.   We have seen over the past 4 to 5  years, a large percentage of consumers obtaining variable interest rate loans, especially on residential properties.   A variable interest rate loan generally allows the borrower to obtain a larger amount of financing,  because it usually has a lower interest rate at its initiation.  But, it also has the potential of increasing interest rates in the future.

Unfortunately, that future is now. Interest rates have escalated, with projections of continuing escalation.  This will result in higher costs to the consumer  and the consumer being able to purchase “less property.”  Is there another elixir for the consumer?  Ah–creative minds create creative solutions.  Creative is an important word–Did I not just use it 3 times in a 5 word sentence?  The mortgage industry has designed a creative answer–the “Fixed Rate Interest Only Loan.”  This loan allows the consumer to lock in an interest rate for the life of the loan, while reducing their monthly payment,  because all they pay is interest and no principal payments, for typically the first 10 or 15 years.   According to UBS AG, these loans now account for around 8% of all new residential loans being issued.  The benefits are that the borrower locks in a single rate for the life of the loan, and at least for the first 10 to 15 years the payments are relatively low.  However, after that initial 10 or 15 year period, the monthly payments jump up because the borrower now has to repay the balance of the loan over the remaining time period.

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