INTERESTONLY MORTGAGES

1
INTEREST-ONLY MORTGAGES

• Tanesha Walker
• Tatyana Kandiner
• Audrey Susman
• Amanda Hodge
• Chris Adamson

2
Reference to Textbook

• Textbook
• Chapter 13
• The Mortgage Market
• Pg.386
• Interest Only Strip
• (IO strip)

• Presentation
• Definition
• History
• Advantages
• Market Risks
• Ways to Reduce Risks

3
What is an Interest-Only Mortgage?

• A Combination of Payment Plans
• Monthly Coupon Bond that Matures into
  Amortization
• Collateralized by Real Property

4
Example

• Principal 100,000
• Interest 6.00
• 5 Year Interest-Only
• 30 Year Amortization

5
Interest Only Mortgage Structure
6
Effects

• Monthly Payments are 100 Less During
  Interest-Only Period
• 30,000 in Interest is Paid During This Period
• No Equity is Accrued During This Period

7
Opportunity Costs

• 6,946 in Equity
• PMT is 99.55 Less (but avg. equity accrued
  during 5 year period would average out to be
  116)
• 973 in Extra Interest Paid

8
Then and Now

• History
• Cash-Flow Borrowers
• Debt-Leveragers Borrowers

9
Advantages

• Lenders
• Increases Profit Per Loan
• Increases Potential Customer Base
• Increases Investment Management Opportunities

• Borrowers
• Decreases Monthly Payments
• Increases Purchasing Power
• The Entire Payment is Tax-Deductible
• Leveraging Income

10
Risks

• Lenders
• Default Risk
• Moral Hazard
• Adverse Selection
• Interest Rate Risk
• Higher Duration

• Borrowers
• Market Risk (Decline in Houses Price)
• Cash Flow Risk (Lost of Income)
• Interest Rate Risk (ARM)

11
Growing Interest in Interest-Only Mortgages

• Statistics
• In 2001 -2 Borrowers
• In 2005-22 Borrowers
• Regions
• Lenders
• Wells Fargo
• Washington Mutual
• Fannie Mae

12
Risk Abatement

• Lenders
• Require Equity Ratio Prior to a Loan
• Rely Heavily on Forecasting
• Add New Restrictive Covenants

• Borrowers
• Weight the Advantages and Disadvantages
• Choose the Right Mortgage Option
• Be Realistic about Your Cash Flow
• Keep Track of the Economy
• Make Arrangements to Pay off the Principal

13
Summary

• What is an Interest-Only Mortgage
• History (Now and Then)
• Advantages
• Risks
• Lenders
• How to Reduce Risks

14
Question

• Which of the following is NOT an
• increased risk for interest-only
• mortgage lenders?
• Adverse Selection
• Market Risk
• Moral Hazard
• Default Risk

15
INTEREST-ONLY MORTGAGES

• Tanesha Walker
• Tatyana Kandiner
• Audrey Susman
• Amanda Hodge
• Chris Adamson

16
Works Consulted

• Balance Financial Fitness Program, Interest-only
  Mortgages Boon or Bust?,http//www.balancepro.ne
  t/education/publications/interestonly.html,
  accessed on October 10, 2005
• HSH Associates, Financial Publishers, The
  Principal Facts of Interest-Only Mortgages,
  http//library.hsh.com/?row_id58, accessed on
  October 10, 2005
• Builder Online, Interest Increasing in
  Interest-Only Mortgages, http//www.builderonline
  .com/industry-news.asp?sectionID31articleID1662
  15, accessed on October 10, 2005
• MSN Money, Are There Too Many Homeowners?,http/
  /moneycentral.msn.com/content/Banking/Homefinancin
  g/P98896.asp, accessed on October 10, 2005
• RealtyTimes, Interest Only Loans Ease Monthly
  Obligations,http//realtytimes.com/rtcpages/20030
  115_interestonly.htm, accessed on October 10,
  2005
• Bankrate.com, Who should and shouldnt get an
  interest-only mortgage, http//www.bankrate.com/b
  rm/news/mtg/20020620b.asp, accessed on October
  10, 2005
• Bankrate.com, Interest-only mortgages target
  high-priced homes, http//www.bankrate.com/brm/ne
  ws/mtg/20020620a.asp, accessed on October 10, 2005