Interest Only Loans Boost Portland Market

Three years ago, if I were to mention to my clients about interest only mortgages, ninety percent of them would laugh at me...thinking it was the most ridiculous thing to do.

Today, about 1/3 of the home loans out there are interest only. Thanks to the all time low interest rates (lowest in the last 50 years), people are borrowing left and right, paying no principal and enjoying a low monthly payment. For an average loan of, say $200,000, an interest only loan could save up to $200 a month compared to a 30-year fixed conventional loan.

Aside from our borrowing rates being at all time low, this phenonmenon is partly driven by the soaring home prices. Interest only mortgages help create home ownership and making home purchase affordable on a short term basis. The combined effect tempts renters to purchase homes quickly. As such, a surge in demand drives the housing inventory even tighter than ever. Simple economics, when demand exceeds supply, prices go up.

However, what's going to happen after the "honeymoon" period when repayment of the principal is due? Or when interest rates shoot up to the good old double digit? For those folks who have taken advantage of the interest only, no down payment option, they could be in for a shock. Most mortgage bankers would tell you to refinance after 3 to 4 years to secure the lower long term interest of a conventional mortgage. However, when a home owner purchased a house with $0 down, interest only loans, he/she is not likely to have enough equity in the home to refinance.

Traditionally, only the wealthy could afford to take the risk of interest only loans. The interest rate fluctuation isn't going to make them or break them significantly. When this type of loan become a mass product, however, there's danger ahead. We're likely to see a rise in the foreclosure market in the next 5 years if interest rates go above 8% to 9%.