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atlanta mortgage refinance
Interest-only mortgages appeal to some in S.C.
By Ben Werner Bankrate.com COLUMBIA - Nearly a third of all
mortgages made in South Carolina last year were interest-only loans - low-cost, at least initially - but a risky form of borrowing. Most experts agree that areas most likely to see their use would be hot markets along the coast, including Myrtle Beach, Charleston and Hilton Head. David Bryant, president of Columbia-based Metropolitan Development, was one of those interest-only borrowers. Interest-only
mortgages suit Bryant's needs because he does not like leaving equity in a house for too long. "I turn a house every 36 months," he said. With their low initial monthly payments, interest-only
mortgages allow Bryant to buy homes for minimal cash up-front. But, Bryant warns, interest-only
mortgages are not for everyone. They work best in rising markets. Until a year ago, interest-only
mortgages were considered niche products, used only by the corporate world's elite. That changed when home buyers in hot markets discovered they could use interest-only loans to buy more house for their money because they could put less money down and get by with lower monthly payments. The Federal Deposit Insurance Corp., the government agency that supervises banks, said
atlanta leads the nation in interest-only
mortgages, at 55 percent. In South Carolina, homeowners received more than 238,000
mortgages in 2003, the last year with available data. How many of those are interest-only loans is unclear. Nearly a third of all
mortgages made in South Carolina last year were interest-only loans. Many bankers and federal regulators agree that Charleston, Myrtle Beach and Hilton Head Island probably are popular markets. "My gut says it has got to be on the coast," said John Goettee, Wachovia's Midlands market president. "We've seen people come in knowing they want to put as little [as possible] in a house, keep monthly payments as low as possible and flip the house in 12 or 24 months." In the coastal markets, home values - key to successful interest-only borrowing - are increasing far faster than other parts of the state, he said. The loans typically come in 25- or 30-year terms. What makes interest-only
mortgages different from traditional
mortgages is the borrower does not make payments on the principal for up to a decade. Payments during the first five or 10 years are applied only to interest. As a result, payments during those first few years can be very low. This arrangement gives home buyers the ability to buy more house, but also opens them to risks. After the initial interest-only period, the amount due monthly skyrockets as the borrower starts paying down the loan's principal. Those principal payments, lurking on the horizon, are what cause some lenders and regulators to worry that home buyers are using interest-only
mortgages for the wrong reasons. "It allows some people who can't really afford a property to buy it anyway," said Philip Laughridge, of Charleston-based Church Street
mortgage. Such a strategy works well as long as home prices continue increasing. If property values are flat, homeowners could find they're in trouble when selling a house bought with an interest-only
mortgage, said Walt Standish, chief executive of Myrtle Beach-based Beach First National Bank. "I have mixed feelings about the topic," he said. With a traditional
mortgage, he said, borrowers start paying down a portion of the principal in the first year. With interest-only
mortgages, borrowers still owe the entire principal up to a decade after getting their loan. "Part of the problem for bankers is there's starting to be a feeling [among customers] that values can't go down," Standish said. "History tells us values can fluctuate." Interest-only loans With an interest-only
mortgage loan, you pay only the interest on the
mortgage in monthly payments for a fixed term. After the end of that term, usually five to seven years, you either
refinance, pay the balance in a lump sum, or start paying off the principal, in which case the payments jump. Source: Bankrate.com
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