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Banks embracing a housing-bubble favorite: interest-only loans

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  • Banks embracing a housing-bubble favorite: interest-only loans

    "Come here, Norman. Hurry up. The loons! The loons! They're welcoming us back."
    - Ethel Thayer in On Golden Pond

    Banks embracing a housing-bubble favorite: interest-only loans

    Customers for interest-only loans are often self-employed and capable of making big down payments and maintaining fat bank accounts.

    Most of the risky mortgages that triggered the financial crisis have disappeared from the marketplace, and lenders will have even more reason to avoid them because of a new federal crackdown on loose lending.

    But one housing-bubble favorite — the interest-only loan — will remain a common offering to well-heeled home buyers, despite new rules from the Consumer Financial Protection Bureau. The rules, which took effect last week, exclude interest-only loans from "qualified mortgage" status, which protects lenders from liability over defaults.

    Bankers don't seem worried about affluent clients missing payments. With high-end home prices on the rise, they have recently embraced jumbo mortgage lending, including interest-only mortgages. That trend continued this week as the banks reported earnings, with Bank of America Corp. saying 36% of its fourth-quarter mortgages were jumbo loans, up from 23% of originations in the first quarter.
    Enjoy.

  • #2
    Too bad the LAT is too interested in fanning flames of class warfare to bother nothing what the actual purpose of interest-only loans is.

    I do get a kick out of people who like to pretend that interest-only loans are somehow new or inherently risky.
    It's been ten years since that lonely day I left you
    In the morning rain, smoking gun in hand
    Ten lonely years but how my heart, it still remembers
    Pray for me, momma, I'm a gypsy now

    Comment


    • #3
      Originally posted by Adam View Post
      Too bad the LAT is too interested in fanning flames of class warfare to bother nothing what the actual purpose of interest-only loans is.
      Okay, why don't you tell us what the actual purpose is.
      Enjoy.

      Comment


      • #4
        Originally posted by Norm dePlume View Post
        Okay, why don't you tell us what the actual purpose is.
        Investment, and occasionally for spec-construction. There's a reason why these loans usually have a two-year term before the principal starts coming due: that's how long one has to hold onto a house before re-selling it to avoid capital gains.
        It's been ten years since that lonely day I left you
        In the morning rain, smoking gun in hand
        Ten lonely years but how my heart, it still remembers
        Pray for me, momma, I'm a gypsy now

        Comment


        • #5
          Originally posted by Adam View Post
          Investment, and occasionally for spec-construction. There's a reason why these loans usually have a two-year term before the principal starts coming due: that's how long one has to hold onto a house before re-selling it to avoid capital gains.
          So they aren't for people who are buying a home to live in?
          Enjoy.

          Comment


          • #6
            So, it's usually only a two-year term before the principle starts coming due, right?

            Fixed-rate interest-only loans

            Note: Bank of America offers the interest-only payment option on jumbo loans only.
            Fixed-rate interest-only loans have a 30-year term and an initial time frame, usually 10 years, during which you can choose to make interest-only payments or both principal and interest payments. This means the initial payments are comparatively low, allowing you to use the balance of your cash flow for other immediate needs. At the end of the interest-only period, you will be required to pay both interest and principal so the outstanding balance will be paid in full over the remaining 20-year term of the loan.
            I guess the investor plans on having these homes on the market for a really long time.
            Enjoy.

            Comment


            • #7
              Originally posted by Norm dePlume View Post
              So they aren't for people who are buying a home to live in?
              Depends upon one's situation. There is on one-size-fits-all answer, just like there's no one-size-fits-all loan product.
              It's been ten years since that lonely day I left you
              In the morning rain, smoking gun in hand
              Ten lonely years but how my heart, it still remembers
              Pray for me, momma, I'm a gypsy now

              Comment


              • #8
                Originally posted by Adam View Post
                Depends upon one's situation. There is on one-size-fits-all answer, just like there's no one-size-fits-all loan product.
                Ah, so there is no one-size-fits-all actual purpose for interest-only loans. No wonder the LA Times didn't bother noting one.

                The actual purpose is to make the payments lower for the interest-only period. And the inherent assumption that makes it work is that the house is presumed to increase in value during that period.
                Last edited by Norm dePlume; Monday, January 20, 2014, 1:37 PM.
                Enjoy.

                Comment


                • #9
                  Originally posted by Norm dePlume View Post
                  So, it's usually only a two-year term before the principle starts coming due, right?
                  Not exactly. I probably stated that inartfully. It would have been clearer to say that most interest-only loans only exist over about a two-year term, or a little longer, so that someone can complete construction, renovation, whatever and then sell while avoiding the capital gains tax.

                  Originally posted by Norm dePlume View Post
                  I guess the investor plans on having these homes on the market for a really long time.
                  You should consider reading your own link instead of being so incredibly focused on trying to pull off a "gotcha:"

                  Interest-only loans tend to appeal to people whose income fluctuates (those who are self-employed, on commission or on a bonus schedule) or who expect to own their home for a short period of time.
                  In other words, investors.
                  It's been ten years since that lonely day I left you
                  In the morning rain, smoking gun in hand
                  Ten lonely years but how my heart, it still remembers
                  Pray for me, momma, I'm a gypsy now

                  Comment


                  • #10
                    Originally posted by Adam View Post
                    Not exactly. I probably stated that inartfully. It would have been clearer to say that most interest-only loans only exist over about a two-year term, or a little longer, so that someone can complete construction, renovation, whatever and then sell while avoiding the capital gains tax.

                    You should consider reading your own link instead of being so incredibly focused on trying to pull off a "gotcha:"



                    In other words, investors.
                    Everyone who purchases a home is an investor. And the "gotcha" was about the interest-only period (which you were perfectly clear on, just wrong).
                    Enjoy.

                    Comment


                    • #11
                      You're right, Norm. We should just eat the bankers.
                      It's been ten years since that lonely day I left you
                      In the morning rain, smoking gun in hand
                      Ten lonely years but how my heart, it still remembers
                      Pray for me, momma, I'm a gypsy now

                      Comment


                      • #12
                        Originally posted by Adam View Post
                        You're right, Norm. We should just eat the bankers.
                        If you pick the right banker, that might get you a better interest rate, but that's your call. I'd settle for making sure they keep these loans on their own balance sheets and maintain some reasonable capital requirements.
                        Enjoy.

                        Comment

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