In Defense of Interest Only Mortgages

Bank Rate recently published an article which denounced the interest only loan for nearly all borrowers. They state that interest only loans were around in the great depression and ended with a massive wave of foreclosures. They state that today's adjustable rate mortgages are even riskier, however their fears are largely unfounded.

In the article, the author discloses a number of risks which are associated with interest only loans. What the other misses on is that he fails to put the home mortgage in the context of a complete financial plan. The author states that the adjustable nature of interest only loans can result in dramatically higher payments when the loan begins to adjust. He also warns that unscrupulous loan officers might lie to the customer about the benefits of an interest only mortgage and set false expectations about the power of interest only loans. He also warned that there would be a great amount of foreclosures from depressed home values.

Let's look at a few of the issues he brings up. He mentions that when properties lose value, there will be a significant of foreclosures on the property because people don't have any equity in them, but a property will lose or gain value regardless of whether there is a mortgage on the home. A lender will actually be less likely to foreclose on a home with lower equity because chances are the lender will lose money. These homes will more likely be granted a forbearance agreement or another arrangement.

The author fails to mention that the fixed period of a loan can be for up to ten years before the loan begins to adjust or amortize. The borrower can use this time to increase his or her income and refinance into a better lifestyle. No one is forcing the homeowner to stay in their mortgage, unless there is a prepayment penalty, but those can be avoided.