The use of interest-only loans for home purchases was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes.

Interest-only loans are loans in which borrowers pay only the interest due for a specified time.

The District of Columbia topped a list of the 20 states/districts with the highest percentage of interest-only loans during the period of January to June 2005, according to data released by LoanPerformance. During that time, 52.3 percent of home purchase loans in the Washington, D.C., region were interest-only.

Virginia followed with 43.8 percent of all loans as interest-only for the same period; Colorado had 43.7 percent; Arizona had 43.1 percent; and California had 41.8 percent.

The rest of the top 20 states with the highest percentage of interest-only loans for the first half of the year in decending order were: Maryland, Nevada, Washington, Oregon, Minnesota, Utah, Georgia, Idaho, Florida, Deleware, Hawaii, South Carolina, North Carolina, West Virginia and Massachusetts.

The national average of interest-only loans was 28.5 percent during the first half of 2005.

LoanPerformance also tracked the top 25 metropolitan areas that had the largest percentage of interest-only loans during January to June 2005. Santa Cruz-Watsonville, Calif., topped this list with 54.8 percent of all home purchase loans being interest-only, and San Francisco followed with 53.4 percent. Washington, D.C., had 51.8 percent; Boulder-Longmont, Colo., had 49 percent, and Oakland, Calif., had 48.8 percent.

The rest of the top 25 metro areas with the highest percentage of interest-only loans for the first half of the year each averaged above 40 percent. In descending order they were: San Diego; San Jose, Calif.; Vallejo-Fairfield-Napa, Calif.; Santa Rosa, Calif.; Denver; Phoenix-Mesa, Ariz.; Salinas, Calif.; Seattle-Bellevue-Everett, Wash.; Tacoma, Wash.; Stockton-Lodi, Calif.; Sacramento, Calif.; Fort Collins-Loveland, Colo.; Reno, Nev.; Modesto, Calif.; Orange County, Calif.; Santa Barbara-Santa Maria-Lompoc, Calif.; Colorado Springs, Colo.; Provo-Orem, Utah; Ventura, Calif.; and Los Angeles-Long Beach.

While some analysts caution that these loans pose potential threat to the nation’s housing markets, others are unconcerned, saying that lenders carefully assess the risk of these loans during the underwriting process.

Freddie Mac’s chief operating officer in September downplayed potential concern about loans where borrowers pay only the interest due, known as interest-only loans, or less than the interest due, known as “negative amortization” loans because principal amounts due increase, reports said.

“On the (interest-only) and the (negative amortization), on the stuff that we have seen come through us, the credit quality is actually higher than on the 15- and 30-year fixed,” said Eugene McQuade, speaking at a Bank of America conference in San Francisco.

As of the end of June, 59 percent of McLean, Va.-based Freddie Mac’s $1.3 trillion loan portfolio was in 30-year fixed-rate mortgages and 27 percent was in 15-year fixed-rate mortgages. One percent was in interest-only loans and another 10 percent was in various adjustable-rate mortgages.

A recent Wells Fargo-commissioned survey of American homeowners showed that the majority of homeowners do pay principal on interest-only real estate loans, despite rising concern over this type of debt.

Of the 8 percent of homeowners with interest-only real estate-secured accounts, a 73-percent majority pay both the principal and interest at least some of the time, according to the results of Wells Fargo’s Second Annual Survey of American Homeowners released in October. Of the 73 percent, 23 percent pay the principal in addition to interest all of the time while an additional 8 percent make principal payments as well as interest payments outside of the standard payment schedule.

Just one in four, or 25 percent, pay only interest all of the time, according to the Wells Fargo survey.

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What’s your opinion? Send your Letter to the Editor to jessica@inman.com; (510) 658-9252, ext. 133.

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