Interest-only loans cater to the rich, but co-ops still don’t like financing tool

Interest-only loans help borrowers free up cash and take advantage of tax benefits, but they have become rare since the financial crisis, available only to the wealthy because of tighter banking standards, according to the New York Times.

The number of interest-only loans plummeted in 2010 after Freddie Mac stopped backing them because of big losses. The government’s decision caused many lenders to follow suit. The ones who still did offer the loans tightened their standards; today, the borrower is generally required to have at least 30 percent equity in a property and a FICO score of at least 720. 

Moreover, “a lot of lenders will want to see assets to cover as many as 24 months’ worth of principal, taxes and insurance payments,” Richard Pisnoy, a principal of Silver Fin Capital, a brokerage in Great Neck, N.Y., told the Times.

The lenders’ demands mean the well-to-do are the ones who can secure interest-only loans, often to keep their mortgage payments manageable. Many of the borrowers, such as those working in the financial services industry, rely on bonuses for much of their income, and “they take some of that bonus and pay down their mortgage each year,” David Adamo, the chief executive of Luxury Mortgage in Stamford, Conn., told the Times.

Community National Bank and National Cooperative Bank offer interest-only loans for the New York co-op market but don’t see much demand because co-op boards dislike the financing method, Jordan Roth, a senior branch manager of GFI Mortgage Bankers in Manhattan, told the Times.

“We’re finding a number of co-ops that are becoming more conservative when it comes to the mortgage products they will allow their prospective buyers to use,” Roth said. [NYT] –Hiten Samtani