Jumbo borrowers rushed into interest-only mortgages during the housing run-up; now many face loans entering their principal-repayment period
Jumbo-mortgage borrowers feasted on interest-only loans during the housing boom, enticed by low down payments and monthly outlays. But a monthly sticker shock could be ahead for these borrowers.
During the peak of the housing boom, from 2004-07, interest-only mortgages gave some buyers access to bigger or better homes than they likely could have afforded with a traditional principal-and-interest monthly payment.
The interest-only mortgage was meant for borrowers who had variable cash flow, such as independent contractors or salespeople who got large year-end bonuses. The loans attracted people who expected their income to rise over time, allowing them to handle principal payments later.
But a product meant for a select few was oversold, says Mark Livingstone, president of Cornerstone First Financial, a mortgage broker in Washington, D.C. Borrowers in high-price markets who had steady incomes and could afford a principal-and-interest payment instead opted for interest-only loans. Many borrowers who put down less than 20% with these loans were told that the rising real-estate prices would cover their lack of equity.
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