Tuesday, April 3, 2007

Interest Only Loans

All Financial Matters has this to say about interest only mortgages. Here are my comments on the topic.

I agree, that IO loans are a great option for people that use them correctly. I personally wouldn't invest the money in the market, though that would probably be the most financially agressive thing to do. What I would do would be to have the IO loan with the low IO payment but continue to pay as if it was the 30-year loan. This would substantially reduce the length of my mortgage.

IO loans were initially developed so people with unsteady income (sales people, etc.) could have a low fixed rate which would allow them to make minimum payment and also catch-up payments throughout the term of the loan. This would keep them on track for paying it off in 30 years (or fewer) and wouldn't be such a shock to the system when it reverted after the IO portion finished.

It was NOT intended to do what it has been used for recently (sorry commenter Joe) which is to let people get into houses they can't afford with traditional mortgages. All this new use has done is guarantee that when it comes time to adjust a lot of people are going to be in trouble and will have to sell (if they aren't upsidedown on their mortgage). It's like a credit card. If you don't make more than the minimum payment you're going to get in trouble.