Interest Only In Your Best Interest?

Prior tothe depression of the 1920s, there was a mortgage loan product used by many ofthe 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 the1920s and into the early 30s, many of the citizenry of this country chose tolive above their means. They chose theinterest only loan because it allowed them to purchase a larger home for lessmoney. What happened when the stockmarket 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 noequity built into their homeownership. When no equity builds, and the income ceases, the bank forecloses andresidents or forced from their homes.

During theGreat Depression this happen to many many homeowners. It was at this juncture that many landinginstitutions chose can remove this loan product from their offered products asit was simply too risky. But with thecreation of the many mortgage products offered today, the interest only loanhas made a return. And what a return!

Today theinterest only loan market segment comprises some 30% of the entire loan market;a development of only four years. Priorto 2001 days only loan market was a 3% segment of the entire market; theexponential growth we've experienced has set new records not only for themortgage market, but for many financial markets in general. Add to this tremendous growth the alsotremendous growth of the housing industry, and you have a very delicatesituation.

But doesthe interest only loan good for theaverage consumer? Not very much. There are individuals who truly benefit froman interest only loan, but they fall into a very small category. The greatest benefactors of interest onlyloan would-be investment individuals and young professional individuals who donot intend to retain their home for more than five years. How many of the actual mortgage applicantsfollow into this category? Less than5%. So how do we have only 5% of thepopulation that actually qualify for the interest only loan, and an interestonly loan market of 30%?

We havethese conflicting figures because not everyone that purchases in interest onlyloan truly benefits from an interest only loan. The mortgage lender is not concerned with the benefit of the product tothe purchaser. The mortgage lender isinterested in the profitability of the product he or she has sold. Andinterest-only loan is a truly profitable product. In fact, the entire payment is a profit tothe lending institution. Not one pennyof the payment applies to principal for a specified term. Interest only payments, generally compriseonly five to seven years of the entire term of the loan. After the initial five to seven year interestonly term, the consumer begins to pay greater payments that apply to bothprincipal and interest. As you can saythis is truly not in the interest of the consumer, as most consumers do notbegin to see a rise in income as quickly as they begin to see a rise inmortgage payment.

Investorswho have a trying staff of financial advisers and lending specialists trulyunderstand how to use an interest only loan in order to turn a profit, butthere is where an investor is not a homeowner. For homeowner has no interest in profitability, they are concerned withresidency stability. They cannot affordto lose their home; an investor can afford to lose an investment. As you can see, there may have been merit andvalidity to the decision to remove interest only loans from their productoffering during the 20s and 30s; it's quite possible today, that we have lostsight of the devastation and destructionwitnessed during the Great Depression. Let's just hope the bubble doesn't burst. Interest only loans are encouraging borrowersto live at the limits of their means, and I don't think that's good for theborrower, the economy or the housing market. What happens to the homeowner, should the bubble burst?