More than a third of the mortgages written in the Washington area this year are a risky new kind of loan that lets borrowers pay back only the interest, delaying for years repayment of any loan principal. Economists warn that the new loans are essentially a gamble that home prices will continue to rise at a brisk pace, allowing the borrower to either sell the home at a profit or refinance before the principal payments come due.
The loans are attractive because their initial monthly payments are tantalizingly low about $1,367 a month for a $320,000 mortgage, compared with about $1,842 a month for a traditional 30-year, fixed-rate loan. If home prices fall, though, borrowers could lose big.
“It’s a game of musical chairs,” said Allen J. Fishbein, director of housing and credit policy at the Consumer Federation of America. “Somebody is going to have the chair pulled out from under them when they find prices have leveled out and they try to sell, only to find they can’t sell for what they paid for it.”
About 54 percent of home buyers in the District purchased their homes using interest-only loans so far this year, according to LoanPerformance, a San Francisco-based company that tracks loan originations nationwide. About one-third of buyers in Maryland and Virginia are buying with interest-only loans.
Just five years ago, only about 2 percent of home-purchase loans in the Washington area involved interest-only terms.
And that last is the key point here. In five years, interest-only loans have gone from 2% to more than a third of mortgages in the Washington area. And as Jack Hitt pointed out to me a few weeks back (before the blog became a group endeavor and I invited him on board), it’s even worse in California, where the rate has jumped from 2% of mortgages in 2001 to 48% today.
This is really not good news.