Banker helps owner with a skyrocketing interest- only loan

Mortgage banker: Terry

Hastings

Home value: $ 375,000

Loan amount: $ 340,000

Loan terms: 4.99 percent 30year fixed

Backstory: Hastings received a call from an owner who was referred by their Realtor. They had purchased their property 10 years earlier with a 30- year fixed interest only loan and the payment was going up by $ 600 per month. They weren’t sure the house was worth what they paid for it, and their bank was not helping them.

Hastings explained how the interest- only loan typically works. While their interest rate was fixed for 30 years, only the first 10 years allowed for an interest- only payment. Once the 10 years was over, the remaining years of the loan required principle payments for the remainder of the loan term.

In the borrower’s case, their loan was turning into a 20- year fixed rate with principle and interest. To make matters worse, the borrowers had made only minimum payments so the original loan amount was still the same.

The interest only loans were designed pre- 2008 to lower the monthly payments and allow more people to purchase homes. The theory was in an appreciating market the home would be worth more every year and the borrowers would always be able to sell and pay back the loan.

The loans were also touted for those wanting to put extra money toward the principle when income such as a bonus was received.

While Hasting’s bank still offered the loans, the repayment and qualifying guidelines were much stricter.

The borrowers put in an application and Hastings ordered an evaluation from a local appraiser. As expected, the property was still worth less than they paid.

Hastings presented a scenario where they could refinance, pay mortgage insurance and still save $ 300 per month. Over time, when the house appreciated, they had the option of getting rid of the private mortgage insurance.

The borrowers agreed with Hastings’ suggestion and provided income and asset documentation. After e- signing the formal application and disclosures they closed less than 30 days later.