The interest only loan that you have available to you today, is the same one that many Americans since the early 20’s had available to them and used. So, your grandparents, or there parents perhaps may have looked for a bit of debt relief with the interest only loan themselves.
There were some differences in the loans from that time to now however. Let’s take a look at some of those differences. This may help us become better educated so we may more efficiently shop for these loans.
In the 20’s the interest only loan was more of a pure product, meaning that they were interest only for the loans life. So, only interest payments and no principal had been paid. This seemed to be a good system until the stock market crashed, and the Great Depression came along. This left a number of lending institutions with a mortgage that was foreclosed, and with no cash. At this point most lenders decided that it would be a better idea to just give out more traditional loans so that equity could be built up. This helped the homeowner have a sort of savings to build wealth in. It helped the bankers as well with their mortgage balances being less outstanding.
The interest only loan these days is not well suited for everybody, and can be a detriment to many homeowners, however for some it is a suitable match, for instance investors who will probably flip the property anyways, or others who will likely be moving sooner than later, and will have no ill effect of the fact that they’re not building any equity in the home.
Nowadays, when lenders offer the interest only loan, they’re required to ensure that no more than half of the loan can be applied to the interest only portion. This helps avoid the same tragedy that was faced in the 20’s and the stock market crash. This type of mortgage is more likely t be appealing to the compulsive shopper who insists on instant gratification, with no solid debt management skills.
As well as putting many borrowers in a position where they own a home, but really have no solid equity in it, it also puts them in a spot where they cannot eventually afford the payments when the principal portion of loan does kick in.
These types of loans, plus the booming of the real estate market has increased purchasing power, and allowed many wannabe homebuyers to make that dream come true. However, every bubble must eventually pop, and the mortgage companies must feel the affects as well.
On the flip side is the purchaser, who may not be able to withstand the consequences, should say the home is suddenly not worth the original amount of the loan.
The one that gets the most benefits out of this loan is by far the lender, and the risk goes mostly to the homeowner. Please practice responsible money skills, and be very selective on the type of mortgage that you choose to go with.