How To Find Interest Only Mortgages In An Amortizing Mortgage World

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If you plan to mortgage your Cincinnati home with a Fannie Mae interest only product, get your loan application together no later than this Friday, June 18.

Interest Only Loans Unavailable?

Starting next week, Fannie Mae is putting major restrictions on the popular "interest only" loan product.  This follows Freddie Mac's earlier announcement to discontinue interest only loans entirely.

As a refresher, an “interest only” mortgage is exactly what its name implies — a mortgage for which the monthly payments consist entirely of interest with no principal due.

Interest only loans do not amortize, and because of that, mortgage payments are lower on a month-to-month basis.

For example, an amortizing, $417,000 mortgage at 5 percent carries a monthly cost of $2,339.  The same payment on a comparable interest only mortgage drops to $1,738.

That’s a payment difference of $601 -- a pretty big deal.

Not surprisingly, the size of the savings is why Fannie Mae is making its guideline change.

Interest Only Mortgages For Financial Management Only

In its official announcement, Fannie Mae says its interest only option is for “borrowers who are in a position to choose it as a financial management tool” and should not be for homeowners just looking for cheaper payments.

Beginning with applications dated June 19, 2010 or later, there are new minimum standards for interest only home loans.

• Applicants must have a FICO of at least 720
• Applicants must have at least 24 months of reserves
• The subject property may only be a 1-unit (i.e. condo, townhouse, single-family)
• The subject property must be a primary residence, or a vacation home

Additionally, cash out refinances are not allowed. Interest only loans are restricted to purchase and rate-and-term refinances only.

Where To Get An Interest Only Mortgage

Interest only home loans aren’t for everyone, but if it's your preference, your options are thinning.

As mentioned, Freddie Mac no longer offers them and Fannie Mae is getting tough. Thankfully, there's places besides Freddie and Fannie where you can "go interest only".  Namely, portfolio lenders.

A portfolio lender is like the anti-bank; a lender that holds loans for profit instead of selling them to Wall Street and portfolio lenders have an appetite for good interest only mortgages -- especially jumbo ones.

If you've been turned down for an interest only mortgage, or just want to know where to find one, call me or.

(Post adapted from Bring the Blog, a blog-writing service for loan officers and real estate agents)