Exorbitant home prices have caused rising numbers of homebuyers to look for creative ways to pay for the American dream, but experts warn that novices should tread lightly.
The most popular of the once-obscure financing options is interest-only loans. Homebuyers are able to get lower mortgage payments by paying back only interest and not the actual cost of the home, or principal, for the first several years of ownership.
In Maryland, 46 percent of home buyers are opting for interest-only loans compared with 1 percent in 2000, according to LoanPerformance, a San Francisco-based mortgage finance analyst company.
“Because of the rising house prices, people are scrambling to enter the market and it?s harder to reach the threshold,” said Mosi Harrington, executive director of Hyattsville-based Housing Initiatives Partnership Inc. HIP offers housing counseling services to about 1,000 clients each year, Harrington said.
Homebuyers who use the loans to jump into a “hot” housing market risk taking a harder hit if the market takes a downturn, Harrington warned. In addition, some homebuyers might not be aware that their mortgage payment will go up once they begin to make payments on the principal.
“Interest-only loans have been around 20 years, and they were originally developed with the really financially sophisticated in mind,” said Mike Fratantoni, a senior economist with the Mortgage Bankers Association.
Fratantoni said the loans are used to achieve flexibility by homebuyers such as those who receive periodic bonuses or commissions and can make sporadic payments toward the cost of the home in addition to their regular interest.
