Interest-Only: Borrower Beware - Washington DC Real Estate
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In overheated markets like the Washington DC area, housing prices have outstripped the ability to borrow in a typical fashion. The Washington Post has an article today on the perils of Interest Only mortgages and the damage they can reap if interest rates keep rising.
Steve Clerman decided to refinance his townhouse in Montgomery Village back in 2003. One offer jumped out at him from the flood of loan solicitations that arrived in his mailbox, and he signed up for an interest-only, adjustable-rate mortgage.
It was a relatively new type of loan, tempting to him and a growing number of people because it required very low monthly payments in its early years, since none of the money was used to pay off the loan’s principal.
Now, though, Clerman feels trapped in a mortgage he says he didn’t understand. In the past year, his interest rate has risen from 4.5 percent to 6.5 percent, and it is likely to head higher. Meanwhile, he has just looked at the loan’s fine print and realized that he is locked into it for five years: If he tries to refinance or sell the home during that period, he owes the lender a $4,900 pre-payment penalty.
“I think I’m going to sell and get whatever I can for it,” said Clerman, 50, an insurance salesman. “I’m in a really lousy mortgage.” Via The Washington Post
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