Interest Only Mortgages
I've been originating home mortgages for well over twenty years and the current crop of mortgage products is overwhelming. Most consumers probably don't have a clue what they are getting. The Interest Only loan which is usually fixed for 3,5,7 or 10 years turns into a one year ARM after that. The longer the fixed period the higher the rate. This can be great for the borrower who intends to move after the fixed period because they can buy more house. Or it can work for the person who may have child support obligations, student loans or other debt that will be gone after the fixed period. Most people with this lower house payment just spend more. A 5/1 IO loan @5.5% for $100K would have interest only payments of $458.33. After 5 years the principal and interest payment would go to $614.09 if the rate stays the same ($100K for 25 yrs), a 34% increase. If the rate went to 7.5% the P&I goes to $738.99, a 61% increase. Many of the newer 5/1 & 7/1 IO ARMs can increase 5% on the first adjustment. Look for good foreclosure bargains when the chickens come home to roost.
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