When it comes to mortgages there is a lot to know and a lot of choices. One loan that was popular before the housing crisis was the interest-only loan. An interest-only loan is an adjustable-rate loan with an initial fixed period when only interest is due.
They are typically available in 5-, 7- or 10-year terms. Economists blame interest-only loans for the foreclosure crisis citing they were issued too freely. Today, interest-only loans are more difficult to obtain.
Borrowers were using interest-only loans to qualify for a more expensive home and when the interest-only term ended the payment went up leaving many homeowners unable to afford the mortgage payment. Interest-only loans are now being used by wealthy borrowers as a financial tool to help them manage irregular cash flow, reap a tax benefit, or free up cash for investment elsewhere. Lenders that offer interest-only loans have strict qualifying standards.
They generally require 30 percent equity in a property, and a minimum FICO score of 720.
Lenders also look at the ability to pay back the loan is based on the fully amortized payment, not the interest-only payment.