"The Further You Go, the Behinder You Get": Interest-Only Mortgages Are a Bad Deal!
A combination of banking deregulation, the growth of the mortgage industry, and the recent housing boom has resulted in a proliferation of mortgage products available to prospective home buyers. Conventional fixed and variable interest mortgages, which traditionally have required a 20 percent down payment, have been joined by a number of government-backed and private mortgages requiring little or no down payment and available with or without "points," or lump sums paid up front in exchange for a lower interest rate.
One mortgage product which has become extremely popular all over the US is the interest-only mortgage, typically offering an unusually low interest rate, sometimes as little as 1.5 percent, and many combined with a balloon payment after an initial period. What many home buyers don't understand is that an interest-only loan typically has two interest rates: the one they pay during the life of the loan and the actual interest rate.
Here's how it works: Say a home buyer opts for an interest-only loan at 1.5 percent. On a 30-year loan of $100,000, the buyer would owe $125.00 in interest at the time of his first payment.
But say the "real" interest rate is more like 6 percent, or $500.00 at the time of the first payment.
The difference, or $375.00, would be tacked on to the principal of the loan, so that in a month the balance of the loan would be $100,375.00!
Interest-only loans never get paid off! - at least not by making the scheduled monthly payments. Many of them are combined with balloon payments which are either paid off or converted to a more traditional mortgage at a later date.
Mortgage lenders have succeeded in selling these mortgage instruments to home buyers by using the skyrocketing real estate prices as justification. What difference does it make if you add several thousand dollars to a $100,000 home when the home will be worth double the price in a year? Unfortunately, the old adage "what goes up must come down" is too true in real estate, and the softening of the real estate market around the country signals the beginning of the end of the boom, or "bubble," according to some.
So what does this mean to a homeowner with an interest-only mortgage? In the above case, the owner will have added more than $4,500 to the principal of the home (due to compounding). Say the home, instead of going up in value, goes down, to $85,000. In a year's time the homeowner will owe in excess of $104,500 on the house, or $19,500 more than the house is currently worth, and have a real problem when it comes time to either convert the loan to a more traditional mortgage or to sell the home.
An interest-only mortgage is enticing; the low monthly payments make it possible for people to buy a home who otherwise could not afford one, and it allows people to buy bigger and better homes than they could with a conventional mortgage.
But the reality is that with the real estate boom slowing down, the interest-only loan isn't the great opportunity is seems to be; it's actually a big, expensive, messy time bomb, waiting to explode..
Aldene Fredenburg is a freelance writer living in southwestern New Hampshire. She has written numerous articles for local and regional newspapers and for a number of Internet websites, including Tips and Topics. She expresses her opinions periodically on her blog, http://beyondagendas.blogspot.com. She may be reached at amfredenburg@yahoo.com.Adverse Mortgages May not Benefit the Consumer Warns Mias
(ContentDesk) March 22, 2006 -- MIAS (the Mortgage and Insurance Advisory Service) is concerned that the boom in the sub-prime or adverse credit mortgage market will not necessarily translate into a better deal for consumers.In the past, the worst excesses of the sub-prime market could be summed up as, the miss-selling of the most expensive and complex mortgages to some of the least affluent and financially-astute people.With so many high street lenders moving into this sector, including Alliance & Leicester and new arrivals such as DB Lending funded by Deutsche Bank, MIAS would hope that this would change. However, the old adage that increased competition is always a good thing for customers, because it brings down prices, may not apply in the adverse credit market. Commenting, Alistair Good, Managing Director of MIAS (http://www.mias-ltd.co.uk ) said: The increased profit margins of the adverse credit sector must be hugely...
Adverse Mortgages May not Benefit the Consumer Warns Mias
Mortgages > Adverse Mortgages May not Benefit the Consumer Warns Mias
Home Loans and Mortgages ? Watch Out for Dangerous Subprime Loans
With the growing interest in real estate purchasing and speculation, more and more lenders are offering "nontraditional" types of mortgages. These include adjustable rate mortgages (ARM) of every shape and size, the more popular interest-only mortgage, and the very dangerous Option ARM mortgage, which can cause the amount you owe to actually increase as time passes. One rapidly growing sector of the lending market is the so-called "subprime" market, which caters to consumers with poor credit records. The subprime market is a profitable one, as lenders offer loans to consumers whose poor payment history targets them as risky clients. Yes, they are risky clients, but the lenders charge fees and interest rates that are high enough to offset the additional risk.
People who are interested in purchasing a home should be careful, however, as many people who should qualify for traditional loans are being pushed into higher-priced subprime loans instead. The subprime market is quite a...
Home Loans and Mortgages ? Watch Out for Dangerous Subprime Loans
Mortgages > Home Loans and Mortgages ? Watch Out for Dangerous Subprime Loans
Principal Facts about Interest-Only Mortgages
"Interest-only mortgages are those where the borrower is required to pay only the interest on the loan for a fixed period of time, though the borrower has the freedom to pay more than the interest. This fixed period usually lasts around 5-10 years. However, if the borrower pays only the interest during the initial period, after the interest-only period ends, the borrower has to pay the entire principal along with the interest within the remaining mortgage term.
Consider the example of a certain amount borrowed at a fixed rate of 6% for 30 years. During the initial interest-only period of say 5 years, the borrower is required only to pay the 6% interest amount each month.
But after this ends, the monthly payments increase to include the amortized principal and same interest, spread over the remaining 25 years.
Comparing this with the normal amortized plan, where the monthly loan amount is broken into fixed monthly payments with a fixed interest rate...
Mortgages > Principal Facts about Interest-Only Mortgages