Interest Only Loans Can Buy More House And More Trouble

Interest-Only Loans Can Buy More House and More Trouble
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.

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