Why is the surge in interest-only mortgages so frightening? Because many people are using them to buy houses that they couldn't otherwise afford. The monthly payment on an interest-only loan is lower because there's no amortization of principal. So people can qualify for bigger loans and buy bigger houses. The availability of such loans has probably contributed to the upward spiral in home prices, as shoppers armed with cheap financing try to outbid each other for choice properties.
The trouble comes when the interest-only feature expires, which is often after 10 years. If it's a 30-year loan, then the entire principal has to be paid off in the final 20 years. So the monthly payment could abruptly jump by 50% -- even assuming no increase in the interest rate (nearly all interest-only loans have adjustable rates, so the borrower can get whacked if they rise as well).
This is one of the most idiotic things I have heard of people doing and now these types of loans make up 31% of the morgatge market. How unbelievable. Don't people have a basic understanding of how such financing works? I really don't think they understand how their payments will shoot up down the road. If they thought about it for a second and didn't get all starry eyed over the lower payment maybe they wouldn't do something so stupid.
Then there is the lenders that are pushing such loans. They deserve everything they get when people start defaulting on these loans. Pushing such a risky mortgage to people is the height of stupidity and doesn't make sound business sense so I hope they suffer down the road.
This is the perfect example of two idiots meeting and deciding to do something dumber together than either of them could imagine doing separately.
Man is an idiot. He doesn't know how to do anything without copying, without imitating, without plagiarizing, without aping. It might even have been that man invented generation by coitus after seeing the grasshopper copulate. Augusto Roa Bastos
The original 30-year loan had as its motive power the idea that you live in the house you purchase until you die.
In the current job market, people are moving a lot.
Look at Rumsfeld, he thinks that the bases closed, which mostly affect National Guard /Reserves troops, means that those folks will just move to bases that are remaining open.