Interest Only Mortgages: Not All That New

[Jun 12, 2008.]

 

Interest only mortgages are, basically, mortgages where the borrower is only obligated to pay the interest each month for a set amount of time. Now, this type of loan was very popular in the 1920’s before the Great Depression and has recently entered into popularity once again.

The idea is really a great one if the market price of the home and the national interest rates were to remain the same. During the 1920's such a fact was possible since the life of these mortgage loans averaged between five and yen years. During the 1930's as real estate prices fell as a result of the Great Depression it was the interest only loans that saw the largest number of foreclosures.

Interest only mortgage loans are once again being offered to borrowers as a cheaper alternative to non-interest only loans. While these mortgages are being marketed as new and the answer too many prayers it has to be remembered that interest only loans are defiantly not for everyone.

The modern day interest only mortgage loans are really just another form of adjustable rate mortgages. The ARMs are already a risky move since they are based on indexes like the national interest rates which are never guaranteed to remain the same at any given length of time. Since the interest only mortgages work along with ARMs the inherit risks are great. Not only this but Interest Only rates are not guaranteed to last for the entire life time of the loan but for, maybe the first 10 years. Most mortgages now a day are much longer then they were in the 1920s reaching 15 or even 30 years. After the initial 10 year interest only period, the borrower is responsible for full payment amount.

Several consumer advocacy groups have found that while lenders are not intentionally misleading borrowers about this fact they are not necessarily telling them otherwise. Many home owners who choose the interest only loans are unaware that it will only last for a decade.

Consumers must remember that ARMs may sound good in the short term but if the rates were to rise, which they most likely will, the borrower may end up paying double or even triple the initial amount. With the introduction of Interest Only loans back into the market place the risks are even greater.