Bad Credit Online Magazine - Daily News and Advice on Credit, Debt and Mortgage : Danger of interest only mortgage

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July 08, 2005

Danger of interest only mortgage

According to Mortgage Bankers Association, 63% of all loans originated in the second half of 2004 were Interest Only and Adjustable Rate Mortgages (ARMs).

People think that they can live in a lot more house than they would able to afford with regular fully amortized loans. Then they hope to sell it and make a fortune in the ever red hot real estate market.

What if the market cools off just a bit? And what if you stuck with the huge mortgage when it becomes fully amortized and the rate is higher than before. Since the majority of the interest only mortgages are ARMs with interest-only payment good only for the fixed part of such an ARM. If you have 3/1 Interest Only ARM at 5%, in three years you will have to start paying principal at often significantly higher rate. Then what?

The 2005 will be even worse we think. Actually, Option ARM is getting so popular these days that it is no longer funny. It is advertised as the cure from the debt.

We at BCA think that Option ARM in reality could be very dangerous for the consumer since it offers very easy trap of Interest Only payments plus Negative Amortization.

 
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