2007-02-19 06:18:10 · 6 answers · asked by Coco32 1 in Business & Finance ➔ Other - Business & Finance
ALSO AS AN ADDED QUESTION,
FOR ANYBODY WHO WILL READ THIS IN TIME,
WHY WOULD ANYBODY WANT TO GET AN ADJUSTABLE MORTGAGE RATE?
WHY DID SO MANY GET THEM?
WHAT WAS THE INCENTIVE TO DO THIS??
2007-02-19 06:26:05 · update #1
Because all loans are secured by some sort of collateral. If the borrower doesn't pay, they have rights to that collateral. In most cases, the lender will only lend up to the value of that collateral so there is no risk in it for them. And all they really want to collect is the interest. The interest part is their profit. If banks had it there way, people would only pay interest and be in debt forever. That is a secured flow of income to the bank.
Adjustable Rate Mortgages (ARMs) usually offer a lower rate to the borrower up front so people are lured into taking them over a traditional loan because they will save more money right away. However, it is a big gamble because if rates go up, then the borrower will end up paying more in the long run. They only pay off if a) rates go down (not common) or b) you sell the property or refinance before the rates go up.
2007-02-19 06:27:40 · answer #1 · answered by Anonymous · 0⤊ 0⤋
Interest only loans are all profit for lenders. You still have to repay the principal.
Now, if the loan cannot be repaid, then the lender would lose money. However, the default rate is about 5%, so 95% percent of the borrowers pay back the loan plus all that interest. Usually, the interest rates on these interest only loans are really high - again, all profit for the lender.
2007-02-19 06:23:13 · answer #2 · answered by Matt K 4 · 0⤊ 0⤋
surely you jest. They collect the interest on the note. They still hold the collateral and at some point in time the client must pay the piper. Most will refinance again and again to avoid paying up. Have you ever seen a shabby bank that lends money? Even in down trodden areas of town they have some very nice buildings. That is your interest payments at work.
2007-02-19 06:24:29 · answer #3 · answered by golferwhoworks 7 · 0⤊ 0⤋
Never heard of that practice lasting for any length of time. Usually it's by accident. (misplaced trust in client)
2007-02-19 06:22:03 · answer #4 · answered by smiling_freds_biz_info 6 · 0⤊ 0⤋
They have a balloon payment at the end for the original balance.
2007-02-19 06:22:31 · answer #5 · answered by Vegan 7 · 0⤊ 0⤋
Long term, it doesn't. Short term, it makes a lot of money off of fees.
2007-02-19 06:26:01 · answer #6 · answered by scarletvanden 2 · 0⤊ 0⤋