Title:
Interest-Only
Loans Can Buy More House and More Trouble
Word Count:
532
Summary:
Interest-only
mortgages have become so popular, they’re spreading like wildfire, but if
borrowers aren’t careful they’re going to get burned.
Keywords:
Oregon mortgage,
oregon home loan, oregon mortgage loan, oregon home equity loan
Article Body:
They're spreading
like wildfire--interest-only mortgages appear to be the panacea for rising home
prices and the incomes that can’t quite catch up. You can buy "more
house" and have a low mortgage payment and a big tax deduction. Who
wouldn’t want one, right?
Well, a large number of consumers are getting into these loans when they
shouldn’t. Interest-only mortgages work well for some individuals and are dangerous
for most others, yet the number of interest-only loans is rising rapidly.
Take a look at San Diego. In 2004 almost half of the mortgages required
interest-only payments in the first few years according to a study done by
LoanPerformance, a San Francisco--based real estate information service. Could
this have something to do with the housing market? You bet it does. Are home
prices rising faster than salaries and incomes? They sure are. So how is one
supposed to afford a house in such an expensive housing market? You guessed
it--an interest-only loan.
Interest only-loans were originally aimed at more sophisticated investors who
wanted to leverage their income by re-directing what would have been the
principal portion of their payment to higher yielding investments that exceed
the rate of their home appreciation. These types of investors typically have
more assets and financial discipline than most and therefore aren't as likely
to get in as much trouble with such a loan.
Today, interest-only loans are being utilized by borrowers who are trying to
leverage debt. What they are doing is getting more debt for their buck; they're
borrowing more money but keeping their payments low (initially) in order to
compete with other buyers in sellers’ markets. Here are some of the potential
dangers that face such borrowers:
• If the principal balance isn't being
reduced, than no equity is being built, and if home prices are stagnant during
the interest-only period and the borrower needs to sell, he'll need to be able
to pay sales costs out of whatever equity there is in the house, if there is
any. Remember, mortgage amortization is in the borrower’s control, appreciation
is not.
• If there’s a downturn in home
prices, the borrower could end up “upside down,” meaning the mortgage balance
on the property could end up being greater than the property’s market value. In
this case, the borrower would be responsible for sales costs and the remaining
mortgage balance which could lead to foreclosure.
Interest-only mortgages make sense for borrowers:
• who have seasonal incomes or earn
commissions and/or bonuses and have a desire to pay on the principal when it’s
convenient.
• upwardly mobile individuals who
expect to earn more in a few years and want to buy “more house” early on rather
than later.
• who intend on investing their cash
flow in higher yielding investments or paying down high-priced debt.
Make sure you know what you’re getting into with an interest-only loan. Consult
with your mortgage broker or lender to know what the possible repercussions
could be, and be sure you’re getting the loan for the right reasons.
Eventually, you want to own your home, and it’s better to be planning on that
sooner than later.