Interest-only loan with fixed rate introduced

Popular components of different products combined to create new type of home loan

The lending industry is certainly creative. Every time there is a shift in the economy or the housing market, they come up with a new type of mortgage designed to tap into whatever current trend may be coming along. Sometimes, it’s a new adjustable rate mortgage, or a long-term 50 year mortgage, or some sort of home loan accelerator designed to help pay off the house sooner, rather than later. The only consistent thing about the lending industry is the inconsistency of the products. If you don’t like what they are offering today, rest assured that something else will come around tomorrow. The large selection of home loans is often bewildering.

The latest loan offering is a combination of two products that have recently been popular - the interest-only loan, which permits buyers to keep payments lower by paying no principal for the first few years, and the fixed-rate mortgage, which is returning to popularity as interest rates rise. The new loan is a fixed-rate, interest-only mortgage that permits buyers to keep their payments low for a few years while knowing that their interest rate will remain the same for the life of the 30 year loan.

Interest-only mortgages have risen in popularity has housing prices have increased. Buyers who can barely afford to make house payments often opt for these mortgages, which have artificially lower payments for the first 5-15 years of the loan. After that, the payments increase dramatically, as the principal must be repaid over a much shorter length of time than for a traditional, 30 year, fixed-rate mortgage. But many buyers assume that by the time the higher payments begin, they will either be earning substantially higher incomes or they will have long since sold the house and moved elsewhere. As the life of the average mortgage in this country is about seven years, that seems likely.

The new loan offers the following benefits to buyers:

• Lower payments than for a traditional, 30 year, fixed-rate mortgage. On a typical loan of $200,000, the payments can be several hundred dollars cheaper. This makes the house more affordable for buyers who are finding their finances a bit tight.
• An interest rate that will not change over the 30 year life of the loan. As interest rates continue to rise, more and more buyers are finding this to be an appealing feature.
• As the interest rate never changes, the buyer knows well in advance when the increase in the house payments will come. This is a nice change from the usual adjustable rate loan, where the rate could change every six months or once a year.

Many buyers will still find the increase after ten years or so to be quite formidable; it would be a good idea for the savvy buyer to add some extra to the monthly payments during the early years of the loan in order to get started whittling down the principal. The sooner the principal is addressed, the sooner the loan can be paid off. This loan isn’t for everyone, but represents another choice in the often bewildering selection of home loans available from mortgage companies.