Interest-Only Loans Risky for Most Homebuyers

July 7, 2020
Two pairs of hands reviewing contract paperwork
By Freedomz

Some experts say that although interest-only loans may seem appealing to borrowers, there is only a small percentage of homebuyers that could use this type of loan, according to CNBC. Interest-only loans are where a borrower makes interest payments only for a set amount of time, usually for the first 10 years or so. Looking long term, the payments can go up and add additional financial stress. Today, these loans come with stricter qualifications compared to the early 2000s where no income verification was needed, but interest-only loans contributed to large spikes in mortgage delinquencies at the time.

As the coronavirus pandemic continues to act as a drag on the economy, the majority of lenders have tightened credit standards across all loan types, according to recent research from Fannie Mae, a government-sponsored enterprise that, along with Freddie Mac, backs mortgages that meet certain standards.

Interest-only mortgages fall outside that category, which means they are not broadly available. Lenders either keep these mortgages in their own portfolio or sell them to investors.

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