Understanding Realty
Interest Only In Your Best Interest?
Prior to the depression of the 1920s, there was a mortgage loan
product used by many of the American people, known as the interest
only loan. Why did this long disappear? And why has it suddenly
reappeared? Let’s take a moment to answer each question, and
hopefully provide some food for thought.
During the 1920s and into the early 30s, many of the citizenry of
this country chose to live above their means. They chose the
interest only loan because it allowed them to purchase a larger home
for less money. What happened when the stock market crashed and jobs
were scarce, and there was no income? Many of these people were left
without homes; as they had chosen to simply pay the interest on
their mortgage there was no equity built into their homeownership.
When no equity builds, and the income ceases, the bank forecloses
and residents or forced from their homes.
During the Great Depression this happen to many many homeowners.
It was at this juncture that many landing institutions chose can
remove this loan product from their offered products as it was
simply too risky. But with the creation of the many mortgage
products offered today, the interest only loan has made a return.
And what a return!
Today the interest only loan market segment comprises some 30% of
the entire loan market; a development of only four years. Prior to
2001 days only loan market was a 3% segment of the entire market;
the exponential growth we’ve experienced has set new records not
only for the mortgage market, but for many financial markets in
general. Add to this tremendous growth the also tremendous growth of
the housing industry, and you have a very delicate situation.
But does the interest only loan good for the average consumer?
Not very much. There are individuals who truly benefit from an
interest only loan, but they fall into a very small category. The
greatest benefactors of interest only loan would-be investment
individuals and young professional individuals who do not intend to
retain their home for more than five years. How many of the actual
mortgage applicants follow into this category? Less than 5%. So how
do we have only 5% of the population that actually qualify for the
interest only loan, and an interest only loan market of 30%?
We have these conflicting figures because not everyone that
purchases in interest only loan truly benefits from an interest only
loan. The mortgage lender is not concerned with the benefit of the
product to the purchaser. The mortgage lender is interested in the
profitability of the product he or she has sold. And interest-only
loan is a truly profitable product. In fact, the entire payment is a
profit to the lending institution. Not one penny of the payment
applies to principal for a specified term. Interest only payments,
generally comprise only five to seven years of the entire term of
the loan. After the initial five to seven year interest only term,
the consumer begins to pay greater payments that apply to both
principal and interest. As you can say this is truly not in the
interest of the consumer, as most consumers do not begin to see a
rise in income as quickly as they begin to see a rise in mortgage
payment.
Investors who have a trying staff of financial advisers and
lending specialists truly understand how to use an interest only
loan in order to turn a profit, but there is where an investor is
not a homeowner. For homeowner has no interest in profitability,
they are concerned with residency stability. They cannot afford to
lose their home; an investor can afford to lose an investment. As
you can see, there may have been merit and validity to the decision
to remove interest only loans from their product offering during the
20s and 30s; it’s quite possible today, that we have lost sight of
the devastation and destruction witnessed during the Great
Depression. Let’s just hope the bubble doesn’t burst. Interest only
loans are encouraging borrowers to live at the limits of their
means, and I don’t think that’s good for the borrower, the economy
or the housing market. What happens to the homeowner, should the
bubble burst?
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