MSN Money recently ran an article stating that interest only loans are bad choices for most borrowers. The headline ran as “Interest-only loans: not magic, usually not smart”.
Then, the next line:
The last interest-only mortgage craze ended with a wave of foreclosures in the Great Depression. Today’s interest-only ARMs are even riskier. Here’s what to ask before you take that risk.
The author does a good job disclosing some of the risks inherent to interest only mortgages, but he avoids putting mortgages in the full context of a complete financial plan. As a result, the article is filled with fear-mongering instead of an actual education.
For example, the author warns of:
- Foreclosures resulting from depressed home values
- Adjustable nature of interest only loans and the dramatically higher payments that can result when the loan begins to amortize and/or adjust.
- Unscrupulous loan officers that misdirect the customer regarding the benefits of interest only loans
To address these issues, one-by-one:
- A property will lose value, regardless of the mortgage product on the property. In fact, a lender will be less likely to foreclose on a property in which equity balances are low because there is a greater loss to the lender. Low equity households are better candidates for forbearance and other payment arrangement plans.
- This is partly true. The fixed period of the loan can easily be 3 years, 5 years, 7 years or 10 years, but it can also be fixed over 30 years. For the ARMs, a homeowner reserves the right to remortgage into a new loan before the products adjusts and/or begins its amortization schedule.
- Customers can combat predatory lenders by seeking education and studying mortgages. There are many wonderful resources for learning about mortgages on the Internet.
It’s only at the end of the article that the author briefly highlights the positives of interest only home loans and he nails it on the head.
In short, it comes down to discipline — just like with any other mortgage product.