People’s Bank began offering interest-only mortgages, which are becoming increasingly popular with Connecticut residents, about a year ago.

Many Connecticut banks and mortgage companies unveiled them a few months ago, but interest-only mortgages are just starting to become popular with many homebuyers in the Constitution State, especially those in high-income areas like Fairfield County.

“The interest-only loans are very popular,” said Wendy Fitzgerald, an area manager for Wells Fargo Home Mortgage, which is based in Milford. Residents, or soon-to-be residents, in places like Westport and Greenwich have shown a lot of interest in only paying interest – for at least the first five years, she noted.

Interest-only loans have been popular on the West Coast for years, but only recently have come east. The loans allow homebuyers to reduce their monthly payments for the first five years or so of the loan by only paying down the interest.

“The neat thing is you’re paying interest only for the first five years,” said Kim Neilson, senior vice president at McCue Mortgage in New Britain.

The reduction in the payments gives financially savvy homebuyers the flexibility to make the money that they’re saving work for them, Fitzgerald said. Most people who take advantage of interest-only loans are higher-income people who invest in the stock or bond market or who want to invest more into a 401(k) plan or pay down higher-cost debt, she said. People who use the loans are often doctors or “Wall Street types,” said Chris Dannen, head of residential sales for Bridgeport-based People’s Bank’s Mortgage Group.

“People on a big commission structure [like the loans],” he said.

Many people take the money they would have put down for the principal and invest it over time so it earns more money, Dannen said.

The loans are also good for people who, because of pay raises or commission earned, will be in better shape financially in five years, when they have to start paying down the principal.

“It’s somebody who’s going to have a good amount of assets,” Neilson said. “It allows them to increase their cash flow.”

‘A Direct Effect’

Interest-only loans also can offer more stable tax deductions, according to information from Wells Fargo.

“Homebuyers may benefit from a longer, more stable period of interest deductions as payments are interest only – 100 percent of the payment may be tax deductible,” according to the company.

Flexible payments also make the loans more attractive, Dannen said. Most interest-only loans allow borrowers to pay down the principal at any time without penalty. That makes the loan popular with high-wage earners or people who get big bonuses.

“[People] who can plunk a lot of money down once in awhile [like the loans],” he said.

Money put toward the principal also impacts the monthly payments, Neilson said.

“It has a direct effect on your monthly payment,” she noted.

Many borrowers like the ease of the interest-only loans, but understand the importance of paying down the principal, Fitzgerald said. The loans are also popular in places like Fairfield County where the people are fairly transient, because if they move before the loan amortizes they could save money.

There is also little risk with the loans, Fitzgerald said. The loans amortize into 15- or 30-year loans at the end of 10 years, so even if the borrower hasn’t been paying down the principal, the loan will get paid off in a timely manner, she said.

“It’s a program that a lot of people should call and ask about,” Fitzgerald said.

Because the loans are popular with the upper crust, the homes purchased with the loans are usually higher-end, Neilson said. The larger the loan, the bigger the savings, she said.

Neilson cited a $200,000 loan as an example. If someone borrowed $200,000 on a regular adjustable-rate mortgage with a rate of 5.5 percent, they would pay $1,135 a month. That same amount borrowed under an interest-only loan would produce monthly payments of $916, she said. There would be an even bigger difference in monthly payments for the first five years if the loan were larger, she said.

Although the loans are relatively new, they have been popular. People’s started offering the loans about a year ago, Dannen said, and about 50 percent of the bank’s adjustable-rate mortgages are interest-only.

“They’ve been very, very popular lately,”

McCue Mortgage also has begun offering the loans. The company introduced the loans at the end of last year in part because it expects the interest-only loans to get more popular as fixed rates go up, Neilson said. The company has loaned a few, but Neilson expects the loans to become more popular.

“We do expect to see more and more people getting interest-only mortgages,” she said. “We’re just getting up and running.”

Wells Fargo offers two interest-only loans. One, called “SmartPay Home Financing,” is available for people who need between $200,000 and $500,000. Another loan, called “SmartPay Home Financing Plus,” is for people seeking between $500,001 and $3 million.

Wells Fargo also began offering the interest-only loans at the end of last year and they are growing more popular, Fitzgerald said.