Risky Home Loans making a comeback

Risky Home Loans making a comeback

by Advisor Websites on Jan 18, 2019

SF Chronicle Section D page 5 12/16/2018 – Paul Sullivan, NY Times writer

One popular loan is the interest-only adjustable rate mortgage, with which a borrower pays only the interest for a period before the rate resets and principal becomes part of the payment.  Another is the income verification or “the ability to repay” loan, tailored to a borrower who does not have regular wages but is paid in large chunks of money – for example, from an investment partnership.

“The Supply-demand imbalance leads not too small price changes, even if a market as a whole isn’t showing stress,” Wachter said. “If you do not need to sell or move or get a better job, or your own financial circumstances change, having a mortgage that exceeds the value of the home will put you in a spot.”

But when the local economy slows or the housing market stalls, interest-only buyers could be hit harder if they weren’t diligent in paying down the principal. Both professors noted that interest-only loans could be smart choices depending on how the buyer thought about the house.

“If we’re talking about independently wealthy households and they’re thinking about cash management and they really do want more debt, this is a way to manage it with a view toward the entire portfolio,” Wachter said.