Not Planning Ahead

I have been seeing more and more advertising for something called a interest-only home loan and couldn't quite figure out how this worked. The advertising always talks about how much cheaper they are than a normal home mortgage and it's easy to see why since if you don't pay down the principal, logic dictates that it will be cheaper. I finally run across an <a href="http://www.businessweek.com/bwdaily/dnflash/may2005/nf20050518_4924_db016.htm?campaign_id=rss_daily" target="_new">article</a> that talks about these interest-only home loans and what I learned dumbfounds me.<br />n<br />n<blockquote>Why is the surge in interest-only mortgages so frightening? Because many people are using them to buy houses that they couldn't otherwise afford. The monthly payment on an interest-only loan is lower because there's no amortization of principal. So people can qualify for bigger loans and buy bigger houses. The availability of such loans has probably contributed to the upward spiral in home prices, as shoppers armed with cheap financing try to outbid each other for choice properties.<br />n<br />nThe trouble comes when the interest-only feature expires, which is often after 10 years. If it's a 30-year loan, then the entire principal has to be paid off in the final 20 years. So the monthly payment could abruptly jump by 50% — even assuming no increase in the interest rate (nearly all interest-only loans have adjustable rates, so the borrower can get whacked if they rise as well). </blockquote><br />n<br />nThis is one of the most idiotic things I have heard of people doing and now these types of loans make up 31% of the morgatge market. How unbelievable. Don't people have a basic understanding of how such financing works? I really don't think they understand how their payments will shoot up down the road. If they thought about it for a second and didn't get all starry eyed over the lower payment maybe they wouldn't do something so stupid.<br />n<br />nThen there is the lenders that are pushing such loans. They deserve everything they get when people start defaulting on these loans. Pushing such a risky mortgage to people is the height of stupidity and doesn't make sound business sense so I hope they suffer down the road. <br />n<br />nThis is the perfect example of two idiots meeting and deciding to do something dumber together than either of them could imagine doing separately. <br />n<br />n<b>Man is an idiot. He doesn't know how to do anything without copying, without imitating, without plagiarizing, without aping. It might even have been that man invented generation by coitus after seeing the grasshopper copulate. Augusto Roa Bastos</b>