Well-off borrowers increasingly are turning to interest-only mortgages, the same ilk of loan that drove many home owners into foreclosure in recent years. With this product, borrowers pay interest but no principal during the first few years of the loan. The monthly payments can be 30 percent to 40 percent lower than regular mortgages.
Interest-only mortgages accounted for about 14 percent of private mortgage originations from January 2012 through October, according to the latest data from real estate analytics firm CoreLogic. Under new mortgage rules by the Consumer Financial Protection Bureau, lenders that continue to provide interest-only mortgages starting in 2014 could face greater liability in lawsuits filed by borrowers who end up in foreclosure.
Lenders say they provide these loans only to lower-risk, affluent borrowers with significant assets. Some borrowers find these mortgages are more flexible, but they do come with risks. Borrowers will not build equity in homes with interest-only payments, and a fall in housing prices could leave borrowers owing more on the home than it is worth.