Jumbo, interest-only mortgage borrowers are in for monthly sticker shock when their principle comes due.
During the peak of the housing boom, from 2004-07, interest-only mortgages gave some buyers access to bigger or better homes than they likely could have afforded with a traditional principal-and-interest monthly payment.
The interest-only mortgage was meant for borrowers who had variable cash flow, such as independent contractors or salespeople who got large year-end bonuses. The loans attracted people who expected their income to rise over time, allowing them to handle principal payments later.
But a product meant for a select few was oversold, says Mark Livingstone, president of Cornerstone First Financial, a mortgage broker in Washington, D.C. Borrowers in high-price markets who had steady incomes and could afford a principal-and-interest payment instead opted for interest-only loans. Many borrowers who put down less than 20% with these loans were told that the rising real-estate prices would cover their lack of equity.
An estimated $934 billion in jumbo interest-only mortgages of all types were sold during the peak years of the housing boom, averaging about $234 billion a year, according to Inside Mortgage Finance, a research group that publishes data on the mortgage industry. By comparison, just $55 billion in jumbo interest-only products were originated in 2002, and $140 billion in 2003, Inside Mortgage Finance says. (Jumbo loans exceed $417,000 in most markets, and $625,500 in high-price markets such as San Francisco and New York.)
Interest-only mortgages come in various forms, including five-year and seven-year initial periods, but the 10-year type, followed by a reset, was popular when the housing market was hot. Now with those loans starting to enter the principal-payment period, borrowers face a dilemma: They can refinance or take their chances on a new, possibly higher, payment. When the payment resets, the principal typically must be paid back over the remaining 20-year life of the loan, instead of over 30 years, says Mr. Livingstone.