Interest-only home loans becoming extinct?

By Aaron Crowe

The days of fogging up a mirror to get a home loan are over, but one remnant of that era of only five years ago will soon be gone: interest-only loans.

Interest-only mortgages won’t meet new federal standards to be classified as qualified mortgages under new rules that take effect Jan. 10, 2014. The cutoff for applying for such loans is mid-November. The coming standards require Fannie Mae and Freddie Mac to only acquire loans that meet the qualified mortgage, or QM, definition — an extra layer of legal protection for the lender based on the borrower’s ability to repay.

Interest-only loans are just what the name implies — paying only the interest on a loan for 10 years, when the principal must begin to be paid. For people who don’t plan on staying in a home for long time, or have fluctuating incomes, they can help make a better home more affordable.

A bad reputation

But when combined with other factors that helped lead to the housing crisis and recession five years ago — such as getting home loans without income or asset verification, and 100% financing — interest-only loans have gotten a bad name.

“The perception among the public is that interest-only loans are not a good idea,” says Matt Hackett, operations manager and underwriting manager at Equity Now, a New York-based direct mortgage lender.

Such loans have decreased lately as lending standards have tightened, according to the Mortgage Bankers Association. The Mortgage Credit Availability Index, which the MBA uses to measure mortgage credit, dropped 0.7% in August, the first drop following four consecutive months of increases.

Read the full story at MortgageLoan.com.