Short-Term Homeowners and Interest Only Loans

Let's assume that you're one of the new age consumers, whofit into the fastest growing segment of the mortgage market today, the interestonly mortgage. It is time to you tosecure a mortgage, and there are several loan options that can be tied to thefeatures you desire; you're particularly interested in the interest onlyfeature that seems so appealing to many consumers today. But have you stopped to question why theinterest only feature has become so popular with consumers today? Are you aware that it is a re-born featurelaid to rest in the great depression of the 20s?

Have you stopped to examine the purpose of the interest only loan and what purpose itwill serve in your particular situation? The original intent of the interest only mortgage was to make homeownership more appealing to young couple; not every prospective buyer, however,is a young person looking to buy home. Careful evaluation of your situation and the interest only mortgage mustbe performed in order to secure the best mortgage possible.

Let's take a look at the original intent of the interest only mortgage, and the greatestbenefactor in the interest only mortgage segment: the short termhomeowner. The idea behind the interestonly mortgage product was to give the short-term homeowner a race in the buyhome, with or down payment requirements associated with the standardmortgage. This idea worked so well, thatnow almost every kind of homeowner is exercising their interest only mortgageoption. As it was only ever reallyintended to benefit the short term homeowner, the interest only mortgageproduct is currently used as a means to buy “more home for less money”.

The appeal to the short term homeowner segment of the market was a way to grow the housingindustry, since this particular type of buyer, normally only rented. In most short-term home ownership,situations, the buyers are young professionals in the beginning years of theircareer, who have tremendous potential, and almost always a guarantee ofpurchase from their company should their home remain unsold after one year onthe open market. As you can see, theconsumer who was initially targeted for this type of loan would truly see abenefit from the interest only mortgage product. Today, however, the consumer actuallyapplying for the interest only mortgage product is a consumer who seems to bespending beyond their income means.

What we have discovered, with today's consumer there is an overwhelming tendency topurchase more home than can possibly be afforded; the reasoning behind such apurchase? Since the term of the interestonly segment of the loan will normally run three to five years, many homeownersare borrowing based on “anticipated earnings”. Quite often, the anticipated earnings never materialize, and at the endof a five year interest only term, the homeowner is left with a much highermortgage payment minus the increased earnings.

As with many other modern-day products packaged and sold to the consumer, it sometimesis not always the wisest choice, the best buy, or the greatest benefit tosimply follow suit; sometimes, educating yourself as a consumer is a muchbetter, and a much more affordable choice.

The long-term, homeowner purchasing to procure a safe haven from which he or shecan retire and be assured of a decent home, is not a benefactor, nor suggestedcandidate for the interest only mortgage product; however, in the attempt togrow this product into a larger share of the mortgage market, many interestonly loans have been advertised as ways to pay off credit card debt, avoid adown payment, and create greater tax savings at the end of the year. None of these reasons, within itself would bea “good” reason to purchase an interest only mortgage product.

Many of the local lending institutions, especially the banking industry, have shied awayfrom the open arms welcome that the interest only product received in themortgage company circle, simply because the loans are a riskier prospect, andmany times consumers aren't as educated about the choices they are making. When you misuse a product, you begin to runinto problems, and create a potentially dangerous market situation.