Interest Only Mortgages: A Risky Real Estate Move?
Well, let's examine this information, one piece at a time. The
first piece to examine is the basis for the desired interest
only mortgage product. What type of investor is looking for the
interest only mortgage? Many of your real estate investors are
business people, looking for a way to maximize their profit,
while minimizing their capital investment.
It is for these investors that the interest only mortgage
options should be used. The borrowers are business people, with
business plans, and enough knowledge about the workings of
commercial and mortgage loans, to understand a good investment
from a bad one. The commercial mortgage industry is a huge
market and the interest only mortgage product serves this market
segment well.
Today, however, we live in a society that encourages instant
gratification, and the concept of me, me, and me. In this
society of self, this new player has emerged, the interest only
mortgage, and he's a big hit with those self-gratifiers. The
interest only mortgage allows a buyer to purchase more for less.
More house for less money is the concept being used to sell this
interest only product to the average consumer, and I don't think
impulse buying is a good thing when it comes to your mortgage.
An interest only mortgage cannot serve a good purpose, except
for the right consumers under the right circumstances. Those
circumstances are few, and the average consumer doesn't fit into
the category most of the time.
The interest only mortgage is not a risky move, if you're
business oriented, with a business purpose, beyond that of
living above your financial means.
I still am not an advocate of the interest only mortgage, but
for some situations they are the best option. In a business
setting, when many factors have been thoroughly discussed, and
the interest only option has proven itself to be the best
choice, I think the interest only mortgage should be used. But
this option should remain as the knowledge of many other
financial options among the masses, virtually unknown.
A tool being used by many commercial lenders to offset the risk
involved with the commercial interest only mortgages is known as
LIBOR. The LIBOR has traditionally affected more of the
commercial market than the private sector. As the private market
moves into a bigger risk sector than ever before, the LIBOR will
loom as a larger figure in the ratio used to determine the
interest to risk factor that your local banker, mortgage
company, or finance company will assume. The interest only
mortgage option is a bit riskier than the traditional mortgage
products, in that it requires little or no down payment, and
over the course of the mortgage, the interest is the only
initial monies collected. That means at the end of the term, say
5 years for most, the buyer still owes the same amount of
principal.
This is where LIBOR begins to play a bigger picture. Commercial
loans, primarily an investment tool, have traditionally been
considered the bigger risk, since these loans weren't providing
housing for the borrower. These new age borrowers aren't really
that committed to these homes, either. Most are using the
interest only option as an economical and inexpensive way to
fund their ability to turn a profit with little or no
investment. Each option means a bigger risk for the lender; and
LIBOR helps to set risk percentages and provide stable financing
options for the lender. The commercial interest only LIBOR
mortgages are for commercial borrowers. These borrowers are
investing in residential unit complexes. In other words, they're
borrowing to buy apartment complexes, not individual homes;
nonetheless, they too are being offered the interest only
options and the interest rate for these commercial interest
mortgages is set by the LIBOR rate plus a certain percentage
above. It is for these commercial investors that the interest
only loan options should be used. The borrowers are business
people, with business plans, and enough knowledge about the
workings of commercial mortgage loans, to understand a good
investment versus an impossible dream.