The downside of interest only mortgages...?

Question

What will be the real effect of millions of interest-only mortgages coming due when the homeowner can't afford the payment?

Answer 1

We are creating a false bubble of home ownership.

If property values fall, not only will the folks who have the interest only loans be up a creek without a paddle, they will then owe more money than their property is worth.

In my opinion, interest only loans are only good for flipping properties and the lenders who do not fully inform the consumer of the possible repercussions of taking an interest only loan, are taking advantage of the public.

I believe this is one of the reasons that (at least in Texas) loans are highly regulated and one must be licensed to participate in many loan interactions.

Hopefully lenders will be more upfront with individuals and help them find a loan that really does meet their needs so we don't end up with a ton of "what do you mean I don't have ANY equity in my house" cycling into a depression.

Answer 2

The principal has not budged an inch. If property values continue to rise, this may not be a big deal. However, if values tank, it will be a major problem.

Assuming that the interest rate is fixed and the homeowner's income stream is maintained there won't be an issue on affording the payments.

The smart money will lock in current (relatively) low rates where the increase in payments won't hurt too much.

The larger risk is with ARMs. Particularly with a 5 or 7 year lock on the rate. If interest rates continue to rise, the shock when the lock expires may cause some significant problems.

Answer 3

Lots of bank takeovers.

Possible glut of cheap houses on the market for someone to take over mortgage.

Answer 4

They'll probably refinance and get themselves one of those new 50 year mortgages.