Interest-Only Mortgage Resets On the Horizon

September 15, 2009 No Comments »

interest only

There was plenty of attention on pay option arms and their nasty resets in months past, but what about slightly more traditional interest-only loans?

A new study from the NY Times/First American Core Logic discovered that there are 2.8 million active interest-only home loans worth an estimated $908 billion in the nation.

Of those, $71 billion will reset in the next 12 months, another $100 billion will reset a year later, and $400 billion will reset after mid-2011.

That could spell disaster for homeowners just trying to hang on with the lower interest-only payments.

Unfortunately, the longer you make just the interest-only payments, the larger the principal balance will be when it comes time to make fully amortized payments.

This isn’t to say you’ll experience negative amortization, but the larger principal balance will need to be paid down in a shorter amount of time.

That means huge, double-digit payment resets, even for loans that were considered somewhat innocuous before the mortgage crisis was realized.

Of course, many of these homeowners expected this to be a problem, as a subsequent refinance or sale was the intended out.

But with all the recent home price depreciation, those that made interest-only mortgage payments over the last five or so years are likely underwater, meaning the propensity to default is high, especially once the monthly payment resets higher.

First American CoreLogic data found that roughly 18 percent of so-called prime interest-only loans are at least 60 days behind; it’s even higher in California (21 percent) and worse in hard-hit states like Florida and Nevada.

Leave A Response