Note: As you may know, we publish all angles and opinions to let you make your financial decisions for yourself. For any major decision, like a mortgage for example, you should do your own research and make the choice that’s right for you.
Bank Rate published an article that denounced the interest-only loan for nearly all borrowers. They state that interest-only loans were around in the great depression and ended with a massive wave of foreclosures. They state that today’s adjustable-rate mortgages are even riskier, however, their fears are largely unfounded.
In the article, the author discloses several risks that are associated with interest-only loans. What the other misses on is that he fails to put the home mortgage in the context of a complete financial plan. The author states that the adjustable nature of interest-only loans can result in dramatically higher payments when the loan begins to adjust. He also warns that unscrupulous loan officers might lie to the customer about the benefits of an interest-only mortgage and set false expectations about the power of interest-only loans. He also warned that there would be a great number of foreclosures from depressed home values.
Let’s look at a few of the issues he brings up. He mentions that when properties lose value, there will be a sign of foreclosures on the property because people don’t have any equity in them, but the property will lose or gain value regardless of whether there is a mortgage on the home. A lender will be less likely to foreclose on a home with lower equity because chances are the lender will lose money. These homes will more likely be granted a forbearance agreement or another arrangement.
The author fails to mention that the fixed period of a loan can be for up to ten years before the loan begins to adjust or amortize. The borrower can use this time to increase his or her income and refinance into a better lifestyle. No one is forcing the homeowner to stay in their mortgage unless there is a prepayment penalty, but those can be avoided.
Customers can easily combat predatory lenders that the author warns about by educating themselves and going into a loan discussion with knowledge. Buying a home is one of the biggest investments you will ever make, so be sure to know what you’re getting yourself into before selecting a mortgage. Don’t just go to anyone who’s advertising, talk to an accountant, or a local financial planner who can refer you to a good mortgage company and a mortgage financing expert (see here).
The author also misses the point that some interest-only products never adjust. 30 year fixed interest-only mortgages are a great way to go for someone just starting. For the first decade, you only pay interest, and then it amortizes over twenty years after you have yourself established and are making more money.
Every type of mortgage has its positives and negatives. An interest-only mortgage might not be the best option for everyone, but for some people, it might be the right choice. You should carefully consider what type of mortgage you are interested in before even thinking about talking to a mortgage company.