Uncovering true cost of interest-only real estate loans

Lenders capitalize on riskier mortgages
Published on Mar 20, 2006

Q: "You have stated that interest-only loans cost more, but how much more?" A: Quite a lot, actually, but it tends to be obscured. Interest-only (IO) is an option available on some loans that allows the borrower to pay only interest--no principal--for some years, usually five or 10. After the IO period is over, the payment will increase by the amount required to pay off the loan over the period remaining to term. Borrowers pay for the option. Because of the delay in reducing the loan balance, lenders view IO loans as riskier than loans that begin amortizing immediately. Naturally, they charge for this risk. Between two loans that are identical except that one has an IO option, that one will be priced higher. Unfortunately, this fact is often obscured. Loan officers and mortgage brokers have a bad habit of comparing the prices of adjustable-rate mortgages (ARMs) that have IO options with fixed-rate mortgages (FRMs) that don't. Since ARMs have lower prices than FRMs, this creates a false...