Is an interest-only loan safe these days?

November 6th, 2009, 1:00 am · 20 Comments · posted by Mathew Padilla

Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…

Debra in Irvine asks:
Q. My husband and I are retired (ages 75 and 68). We have a home in the desert and a small condo in Orange County. Due to the cost of supporting two homes (we do not want to sell the O.C. condo; there is no mortgage on it), we are thinking about refinancing our desert home with a five-year interest-only loan at 4.4%. Refinancing would give us an additional $600 each month for the next five years. At that time, we will probably sell our home (and the condo also) since mortgage rates will be much higher and purchase a smaller home in Orange County with the funds from the sales. But what if after five years we decide we are not anxious to sell? We are concerned we might be forced to sell if rates for a new loan are much higher in five years. We are not quite sure if we are making a wise move with this new interest-only loan. We would appreciate your thoughts on this matter.

A. In my discussions with clients, my objective is to help them find a comfortable balance between risk and cost. Getting a five-year interest-only loan, while it has a lower payment than a 30-year fixed rate loan, seems inappropriate because of the higher risk you clearly see. Do you really want to have to refinance when you are 80 and 73?

Some loan officers just don’t listen to the client’s concerns. They are taught to “push” programs the company thinks that customers might want. An interest-only loan appeals to people who focus on getting a lower payment, even if for a shorter period of time. In your case, I think taking a longer term view would leave you risk-free and more comfortable.

Dooski in Anaheim Hills asks
Q. How many times can you do a modification on your home loan? And why are companies like BofA not abiding by Obama’s law of ‘if your mortgage is more than 31% of your income, the lender is supposed to lower it if you qualify,’ which we do and they aren’t modifying?!? How can they get away with that?

A. In my view, the entire industry has been incredibly unresponsive in doing loan modifications. That hurts millions of people and puts the housing recovery in jeopardy. This may be due in part to the fact that your “lender” just may collect payments for the ultimate lender. He may not have any power to modify loans. But it is clear that not enough modifications are being done and those that are being done fall short of real help.

The big lenders talk about the number of people they hire to do loan modifications; they say they are doing them by the tens of thousands. But it is hard to find borrowers who have been helped. Perhaps they look at participation in the government’s modification programs as “optional.”

The Home Affordable Modification Program had the goal of helping 3 million to 4 million homeowners but a review of the program by the government’s General Accounting Office (http://www.gao.gov/new.items/d1016.pdf - see page 92) showed as of September 25 for loans not owned or guaranteed by Fannie Mae or Freddie Mac only 209,000 modifications had been started and only 1,080 borrowers had successfully completed the program. (Editor’s note: Treasury reported that through September all participating lenders and servicers had 487,081 trial and permanent modifications underway, or roughly 16% off all eligible loans 60 days or more past due.)

We would sincerely like to hear stories from anyone who has actually been helped by a modification. Tell us your story. In the meantime, I would keep calling BofA.

That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla(at)ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question. Johnson will answer up to three questions each week, so keep checking back for a response.

Read prior questions and answers by clicking on the headlines below…

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Bill says:

November 6, 2009 at 7:55 am

A delusional 68 and 75 year old want to take out an interest only loan?

Isn’t a high risk game of Bingo good enough?

Or maybe they’re just a little cranky because their pudding was soggy.

This is why that type of loan should be banned, otherwise the taxpayer will be on the hook for every imbecile that can fog a mirror.

Post Reply

Liar Loan says:

November 6, 2009 at 11:01 am

Billy Bob-
Did you miss the part about them owning an OC home free and clear? These are responsible borrowers, so who are you to tell them how to manage their cash flow?

Post Reply
- Bill says:
  
  November 6, 2009 at 4:05 pm
  
  Read Matt’s comments below.
  
  Come on, this is common sense guy’s!
  
  Post Reply

drkhlmt says:

November 6, 2009 at 8:04 am

Dooski says: “…why are companies like BofA not abiding by Obama’s law of ‘if your mortgage is more than 31% of your income, the lender is supposed to lower it if you qualify,’ which we do and they aren’t modifying?!? How can they get away with that?”

You shouldn’t have taken out a mortgage you couldn’t afford and then expect everyone to help out.

shadow735 says:

November 6, 2009 at 10:28 am

You dont pay much attention to unemployment rates in Calif they are approaching 11-12%. How do you know he isnt in his current situation due to a job loss, injury, sickness or any other number of reasons that have nothing to do with the phrase “taking out a mortgage that he couldnt afford.”

Post Reply
- GD says:
  
  November 6, 2009 at 10:55 am
  
  If you can’t afford to save for a rainy day and pay the mortgage … then you can’t afford the mortgage (notwithstanding what your mortgage broker tells you).
  
  Post Reply
- Sal says:
  
  November 6, 2009 at 12:15 pm
  
  My sympathy well is dry due to too many undeserved asking for too much. We need to repress self entitlement attitudes.
  
  Say it with me:
  “I am not entitled to get a house if I can not afford to buy it.”
  “I do not deserve to keep a house I can no longer afford.”
  
  Post Reply
- drkhlmt says:
  
  November 6, 2009 at 1:43 pm
  
  Because you don’t get a loan mod if you’re unemployed. That’s a well known fact.
  
  Post Reply
  - shadow735 says:
    
    November 6, 2009 at 2:03 pm
    
    That is true but what if one member of the household is unemployed but the other isnt but their income is greatly reduced. Plus it doesnt address, unforeseen illnesses.
    
    Sal rainy day funds can run out, the way the economy is right now a lot of people’s vast rainy day funds could be dry. Fact is bad things happens but that doesnt mean people bought more then they could afford.
    I agree heartily with you and drkhlmt but we dont know Dooski’s financial situation other then he has had previous mods.
    It may be better for Dooski to let his home go, at least he can remove some stress and start to rebuild his credit.
  - shadow735 says:
    
    November 6, 2009 at 2:05 pm
    
    Matt can yuo tell me why “post reply” button disapears(or greys out) on some posts?
  - Liar Loan says:
    
    November 6, 2009 at 2:08 pm
    
    You, sir, are ignorant of the facts. Obama’s program allows borrowers to qualify on unemployment benefits.
  - Mathew Padilla says:
    
    November 6, 2009 at 3:24 pm
    
    Shadow,
    
    The comments system only allows three layers of direct comments. So, for example, if someone posts a comment, a second person can respond directly to it, and a third person could respond directly to the second person. But a fourth person cannot respond directly to the third comment and create another “layer” of comments. But the fourth person could respond to the second or first comment or to the original post.

shadow735 says:

November 6, 2009 at 8:09 am

Dooski do you know who the investor of your loan is? It may not be BofA if it isn’t then BofA has to follow investor guidelines. Here is the link for the HAMP program thru BofA

http://homeloans.bankofamerica.com/homeloanhelp/loan-assistance-solutions/home-affordable-loan-modification.html

Randy one other thing to consider is due to all the changed to HAMP program, and all the other Mod programs going on there is bound to be a huge learning curve especially when the Loss Mit dept has such a high turn over rate for employment.

Bill-1a says:

November 6, 2009 at 8:24 am

For every qualified borrower there is a loan. An interest only loan may not be the loan that Bill (above) would want, but for some it is a great tool. Say for instance a person is going to stay in a property for only 4 or 5 years. The smaller payment could (vs a 30 year fixed rate loan) work in a couple of ways in the borrower’s favor. First, say the savings is $300.00 per month…..take that money, put it into a savings account for 60 months and you have an extra $18,000 at the end of five years. Plenty of money to subsidize an increase in payment once the interest only period is up if they choose to stay a little longer. Or, the borrower could take the savings and reduce their principle each month with the savings, and at the same time this would reduce their monthly payment each month. Discipline is the key, and some borrowers have the discipline. If they actually only live in the property for the five years, then they’re $18,000 ahead.

November 6, 2009 at 8:26 am

Piggyback on my last comment: A 30 year fixed loan over a five year period would also have principle reduction, so the $18,000 net would not be that great, but there still would be a substanial savings.

Scott says:

November 7, 2009 at 12:20 pm

Bill your math is embarrassing.

Any “savings” from not paying principal in an interest only loan, means that you have that much less equity.

Given that Interest Only loans are always at least a slightly higher interest rate, and there is no principal pay down so the amount subject to interest will be higher, you will always be behind by taking an IO loan, unless you are putting the money to work in a way that it earns a greater rate of return than the mortgage interest rate.

There is no substantial savings. There is no savings at all. Interest only is a stealth way to steal from your future equity.

Post Reply

Mathew Padilla says:

November 6, 2009 at 9:21 am

On the first question, it seems like the couple want to see if home prices rebound in five years in the desert area — I would guess they are talking about places like Palm Springs. I have not been watching those areas closely enough to have an opinion on the probability of that. Still, using an interest-only loan to gamble on a price rebound seems risky for their age. What if they have some unexpected medical bills or something?

I wonder how much equity they have in the desert property? I assume they have some because they appear to have spoken with a loan officer or broker who is ready to refinance them. If that’s the case they could sell the desert property and their condo, which has no debt, now and buy something. They will be getting less than they hope for on their properties, but will also be buying cheaper. Makes more sense and is less risky.

Liar Loan says:

November 6, 2009 at 10:47 am

Question #1- Get a 7 or 10 year interest only loan if you’re worried about being forced to sell in 5 years. The rate will probably be .25% higher, netting you a little less savings per month.

Side note: I can’t believe Randy, being a broker, didn’t make this simple suggestion. This is also the second week in a row that he has acted insultingly towards elderly folks. Nice one Randy.

Question #2- BofA has to abide by the contract with the owners of your loan, just as shadow735 suggested. Be persistent and ask them what you qualify for if the Obama program isn’t going to be approved. Also, it may be worth a shot to contact a HUD loan modification counselor because they will advise you for free and possibilty contact BofA on your behalf.

Louie Sez says:

November 6, 2009 at 11:32 am

I hate to say it, but if you are the loan officer handling this type of request, you better be very, very careful, in fact getting the clients to write a letter in their own handwriting what they are wanting to do, and them acknowleding the loan terms in detail would be a good idea, if you want to avoid a potential “elderly financial abuse” claim (even if it is unfounded)

Modguy says:

November 6, 2009 at 2:55 pm

Some people are “eligible” for HAMP (PITI payment is over 31% gross income), but they don’t “qualify” because it doesn’t pass the net-present-value test (NPV).

The NPV is a calculation to determine if the terms required to reach the target payment (say a 2% rate) is worth more to the lender than liquidating.

People are so misinformed. The Lender doesn’t HAVE to bend over and give you a mod, if FC would be a better answer. It’s written into the Obama Plan.

STOP THE ENTITLEMENT ATTITUDE / STOP THE BAILOUTS!

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