Is the Interest-Only Mortgage Making a Comeback?
The interest-only mortgage is staging a comeback in many areas of the U.S. Real estate inventory is low in key areas, so home prices are creeping up, resulting in new demand for this type of mortgage and the cushion it offers.
During the early years of the loan period, the buyer pays only monthly mortgage interest. This drives down the monthly payment, allowing the buyer to potentially qualify for more house. The buyer then has more ability to negotiate in a property price war. Banks that don’t pay attention to the trend could end up losing key customers.
Effect on lenders
Many lenders pulled back from these higher-risk loans in recent years out of concern that default is more likely. Because the buyer isn’t paying down the principal, even a small slip in home value can put the lender at risk. Nevertheless, financial institutions that don’t consider interest-only loans will lose out.
How mortgage professionals can capitalize
The financial institution that can strike a balance between risk and drawing in customers will win this battle. To do this, lenders must use tools to better enhance credit lending abilities. Better access to key information enables better credit decisions, including those related to interest only mortgage qualifications. Banks that utilize this in-depth information reduce the risk of default inherent in these loans. The data includes:
- Asset and property information
- Credit information
- Credit capacity scoring
- Telco and utility payments
- Income and employment verification
Financial institutions need to embrace the interest-only loan scenario again. This time, though, borrowers don’t have to be true risk factors, because better credit qualification processes are now available.
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