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Interest Only In Your Best Interest

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									                           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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