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?