Mortgage options lure new buyers (WI State Journal)

Interest only plans are popular, but may not be in everybody’s best interests. 

When Chris Baumann and his wife, Holly, had their first child in March, they sped up the process of moving out of an apartment and into a home.

Baumann, an account executive for Madison marketing firm Lindsay, Stone & Briggs, said, though , making a monthly house payment became a challenge after his wife quit her job to stay home with their daughter. The Nasser: an interest-only loan that leaves the couple paying interest but not principal on mot of the $192,000 they borrowed to buy a Lake Mills home this month.

To make the dollar go farther I was willing to take more risks, Baumann said. “This is where I wanted to raise my family, in an environment that was larger, had a yard for my dog to play in and had a room for my daughter"”

The trend toward interest-only loans, which started among the high-priced housing on the East and West coasts, is moving into the Midwest, including the Madison area.

More Madison lenders say they’re offering interest-only home loans and even 40- year mortgages to people who think they may own their home for only a short time, for example, due to a job transfer, or who have difficulty affording a house.

Affordability is a growing issue here; a report by the Wisconsin Realtors Association earlier this month showed the median price for an existing home in Dane County is now $200,000... That means half the homes are selling for more than that, and half for less.

But financial planners say most consumers are not well served by these alternative loans and might do better to look at some other strategy for purchasing a home.

Interest-only is really a hot product right now, particularly in areas where housing affordability is an issue, said Rick Aneshansel, chief financial officer and executive vice president of US Bank Home Mortgage in Minneapolis.

The product represents only about 1 percent of US Bank’s total home loans, but it is growing in popularity an is likely to become even more in demand as rising interest rates increase the cost of home ownership, Aneshansel said.

Its growing almost every month, he said of the loans.

That’s not good news to Connie Kilmark. The Madison Financial planner said she wouldn’t recommend an interest -only mortgage to anyone but an “incredibly sophisticated” consumer with a good reason for the mortgage and s sound plan for paying down the debt on the house.

For other buyers, “I would say then you’re shooting beyond your authentic ability to afford this house, “ Kilmark said. “ This is supposed to be an asset-building exercise, not just a home and shelter-accessing exercise”.

Interest –only mortgages may be confusing to some consumers. The borrower pays only interest for the first three, five, seven or more years of the loan, but then has to start paying back the principal, often at a faster rate with bigger payments.

The initial payments for an interest-only loan can be alluring for borrowers on a budget.

For a consumer borrowing $180,000.00 on a home, a 3-year variable mortgage with an interest rate of 4.625 percent would have a monthly payment of$925.00 according to Mortgage 2000 of Madison. A loan with three years of inters-only payments and a slighter higher variable rate of 4.75 percent would have an initial monthly cost of $713.

Nether of those figures includes property tax or insurance, both of which are traditionally considered part of a monthly mortgage payment. Dirk Todd, owner of Red Letter Mortgage in Madison, said interest-only loans still offer advantages over renting, since they allow borrowers to deduct mortgage interest on their tax returns and benefit from any rise in the value of their home. But Todd and most other lenders said interest-only loans were for a select few consumers.

“It’s not a loan that you’re going to sell to everybody” said Mario Barcena of Mortgage 2000. “It takes a very, very, special candidate. It takes the single mom that has only one income”.

That might be someone like Denise Ray of Madison. Ray, a 50- year old single mother of four, used an interest-only loan from Mortgage 2000 to help buy a home earlier this year. Ray was getting divorce and going back to work for the first time in years. She said she couldn’t have bought a home without the interest-only loan.

“I definitely plan on refinancing and going into something more conventional”, said Ray, who expects to establish a better income and credit rating in the coming years.

For Baumann, one of the more difficult parts of taking out an interest-only loan was finding a bank that offered them. Mortgage brokers, who work with many lenders, are still more likely to have them than banks.

But more areas banks now offer interest-only loans, including US Bank, Wells Fargo, Guaranty Bank and, through an affiliated mortgage company, Wisconsin Community Bank. Associated Bank will roll out an interest-only loan by the end of the year and Anchor Bank and UW credit Union officials said they were looking at adding the product.

Lenders fro 40- year fixed rate mortgages can be even more difficult to find.

With an interest rate currently around 6 percent- slightly higher than for a 30- year loan- these mortgages can lower the monthly principal and interest payment on a $180,000 home loan from $1,050 to $990., according to Red Letter Mortgage. But the cost for that is steep, adding close to $100,000 more in interest over the life of the loan.

“They’re not the best thing for consumers”, Barcena said, repeating a reason many local lenders give for why they don’t offer a 40-year loan.

Chad LaFlash of UW Credit Union said his institution is considering adding 10- year mortgages as well as interest only loans.

“We want t make sue that we3 can make home-buying as affordable as possible for our members”, LaFlash said.

Todd said he expects to see more interest in both types of loans.

“I think they’ll become a lot more popular as (interest) rates go higher”, he said. “They’ll serve a purpose in that they’ll be able to get people into homes where they normally wouldn’t.”