Interest Only Mortgages ‘Risky’
Interest only mortgages, which are becoming increasingly popular, are “risky,” economists warn.
More than a third of the mortgages written in the Washington area this year are a risky new kind of loan that lets borrowers pay back only the interest, delaying for years repayment of any loan principal. Economists warn that the new loans are essentially a gamble that home prices will continue to rise at a brisk pace, allowing the borrower to either sell the home at a profit or refinance before the principal payments come due.
The loans are attractive because their initial monthly payments are tantalizingly low — about $1,367 a month for a $320,000 mortgage, compared with about $1,842 a month for a traditional 30-year, fixed-rate loan. If home prices fall, though, borrowers could lose big.
Mark Zandi, chief economist of Economy.com, said buyers are turning to interest-only loans because real estate has become so expensive — but that real estate is becoming so expensive partially because of the use of these new products. “It largely reflects the inability of families to afford a home with a plain-vanilla mortgage,” Zandi said. “This is a way for people to get into what are extremely expensive homes.”
The second trust on my home is interest only, for precisely that reason. In a market where a decent sized townhouse goes for $400,000 people have to take on unwieldy loans just to get in the door. Home ownership is almost a prerequisite to financial security and one needs to start somewhere on the ladder, breaking the rental cycle.
I’m at the point now where, because my property has appreciated in value roughly $100,000 in the 18 months since I bought it, that I have sufficient equity to refinance into a loan without PMI. When I bought the place initially, though, it took some creative financing just to get a loan (or, as it were, two loans).