Interest-Only Option Still Popular In Some Hot Markets

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The continued strength of the housing market in this fast-growing Sun Belt city has prompted high demand for two interest-only loan products offered by Desert Schools Federal Credit Union.

Robin O'Rorke, DSFCU's vice president of lending and chief lending officer, said the credit union has booked nearly 2,000 loans in just a few months. He said members "have really stepped up" because they are seeking the low monthly payment that accompanies an interest-only loan.

"People are all about cash flow; they want the lowest payment possible," he said.

On June 20, 2005, the CU introduced an interest-only home equity line of credit product designed to let its members tap the equity in their homes for investment capital. O'Rorke said Desert Schools has written 1,969 units for $111 million in just eight months.

In addition, late last year DSFCU began offering a fixed-rate, interest-only mortgage option. For the first 10 years of the loan, the borrower has the choice of paying only interest, or principal and interest. After the initial period is over, the loan recasts as a 20-year fixed requiring principal and interest payments. O'Rorke said the credit union has not yet begun promoting this new product, but it has booked 19 units for $4.3 million.

"We still are marketing the home equity product," he explained. "We will market the mortgage product closer to the summer, when demand for loans like that pick up."

Still Appreciating

A downturn in some areas of the United States, such as the Northeast, has prompted some to question if the housing market is on the decline after a lengthy run up. However, O'Rorke said he expects the Phoenix area to remain one of the housing leaders-hough not as white hot as it once was. "For awhile, we had 50% annual appreciation. It was some of the strongest in the country," he said. "Appreciation has slowed recently, but we are monitoring inventory levels and so far so good."

Phoenix continues to add jobs, which in turn brings a continued influx of residents, he continued. O'Rorke expects the area housing market to appreciate at an average rate of 5% to 8% in 2006 "It varies tremendously by zip code-some areas will appreciate 20% to 25%."

Asked if a potential decline in the market could put Desert Schools FCU in the undesirable position of owning its members homes, O'Rorke said the credit union does not let borrowers get in over their heads. "People get in trouble when they borrow 100% of the value of their house and the value comes down," he declared. "We only loan up to 90%. We feel safe because our delinquency rates are so low."

Desert Schools FCU's overall delinquency rate for all home equity and real estate loans is .07%. Of the 1,969 interest-only home equity lines, two are delinquent, he said.

The $2.5-billion credit union, which serves more than 300,000 members, does not charge an application fee for the interest-only home equity product, nor does it charge an annual maintenance or credit line fee. According to O'Rorke, banks typically charge $45 to $75 in annual maintenance fees.

"We offer this product so we don't lose members to Bank of America or Washington Mutual, who offer similar products. But, we differentiate ourselves by not charging some fees and, as a federal credit union, we do not charge a prepayment penalty."

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