Middle America Goes Upscale On Interest Only Options

Middle America Goes Upscale on Interest Only Options

Have you ever noticed if given the choice, day average consumer is going to buy as much as possible on as little as possible. Now that's okay if you happen to be buying an air conditioner, or a pair of shoes or a pair of blue jeans; but when it comes to your home mortgage, bigger is not always better. In the real estate market of today there are many analysts all both sides of the fence that will argue for or against the interest only option and the effect it has on consumer spending.
Right now the vote is still out on exactly what it will cost the taxpayers should we experience a tremendous drop in real estate prices. During the first half of the century the interest-only loan was used extensively. When the Great Depression began, unfortunately, many homeowners who had made use of the interest only loan lost their homes. Today, the interest only loan quarters a full one fourth of the market segment, and that kind of growth is frightening to every economist associated with the real estate market. Why does this kind of growth frighten an economist? The answer is simple: exploding growth in real estate that creates this type of loan market growth is not always stable.
Now, what happens to the consumers who have purchased the interest only loan and the real estate prices drop? What if they owe more now than their property is worth? See, this is where the economist gets really frightened. Defaults on loans, bankruptcies, and a tremendous burst of the real estate bubble could be the resulting conditions.
What else has happened here? Once again consumers have managed to overspend themselves and live beyond their means. Apparently in an optimistic and booming economy this seems to be all right, but when the economy takes a downturn and real estate prices drop, what happens to the consumer with the interest only loan, and no equity? I will tell you what happens. Homeowners can no longer support the mortgage, or rather the real estate value can no longer support the mortgage, and when it is time to refinance a home there is more mortgage than home. In the defense of the homeowner, many of today's mortgage lenders refuse to counsel the consumer about the real consequence of borrowing beyond the value of the home, or borrowing without investing in the value of the home. Eventually, living beyond your income levels will result in a negative impact.
Consumers don't often consider the worst case scenario especially during the time of purchasing a mortgage product. No one assumes the worst; everyone likes to imagine that everything will work exactly as planned. But if your monthly mortgage payment stretches you to the limit and if the budget doesn't leave room for reserve, you're going to find that at some time you'll be short. If you're using the interest only mortgage loan to purchase a home that is really bigger than what you can actually afford with a standard mortgage watch out.
Thanks to the exploding growth of the mortgage loan segment, especially in the interest only loan, you can now buy more house than ever on less money. No down payment requirements and a nice affordable mortgage payment. The problem however is that the borrower who uses tomorrow's salary to buy tomorrow's home today, will usually have the same spending habits when tomorrow's salary is today's salary.
There are individuals for whom the interest only loan is a tremendous benefit and is a perfect fit for the loan. The young professional with a great future, and no intention to remain in the area for more than five years, is the perfect candidate for an interest only loan. But very few of the actual applicants with interest only loans fit this description. Unfortunately, many of applicants for the interest-only loan are simply consumers who want more house for less money. The big house, with the great job, and the picket fence with 2.5 children is a great dream to have. You just need to make sure before you step onto the dream cloud that you've got the net beneath you, something must catch you when you fall!