One reason is that many of those borrowers qualified for their loans on the basis of their ability to repay the lower, interest-only payment. When their monthly payment reset higher, many couldnt keep up.
Thats no longer the case. Now lenders are required to determine whether borrowers qualify for any interest-only loans, or other adjustable-rate mortgages, based on whether they can afford to make the eventual bigger monthly payments that await them once the initial interest-only period ends.
As a result, such interest-only loans now make up only about 0.2 percent of all adjustable-rate mortgages, or ARMs, which account for about 4 percent of all home loans for purchase and refinancing, according to data from CoreLogic.
Use of interest-only mortgages peaked 10 years ago at the height of the housing bubble at around 10 percent of all ARMs.
The big difference here is interest-only loans are back to being the niche product that they traditionally had been, said Greg McBride, chief financial analyst at Bankrate.com. The go-go days of the housing boom were the exception.
Still, rising home prices can make interest-only loans a tempting option for borrowers who are interested in a lower mortgage payment and can qualify for such a loan under todays stricter guidelines.
At least one lender is looking to expand access to interest-only loans to a broader range of homebuyers, not just the affluent buyers who typically take advantage of such loans.
Last month, United Wholesale Mortgage began making interest-only home loans through its network of mortgage brokers. The loan program covers mortgages as low as $250,000. Thats just above the US median home price of $236,400, but well below the recent median price in Southern California of $426,000.
Even with todays stricter guidelines aimed at ensuring borrowers can handle interest-only loans, they carry potential financial risks. Here are some things to consider when weighing whether such a loan is right for you:
Interest-only mortgages can come with a fixed or variable interest rate and an initial period when the borrower only pays interest on the loan. Thats usually three, five, seven or 10 years. After the interest-only period, the monthly payment can increase sharply as the borrower begins to also pay down the principal on their loan.
In addition, the borrower is left with 20 years to pay off the balance of the loan.