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Is Interest Only In Your Best Interest?

Jun 6, 2008
Prior to the depression of the 1920s, there was a mortgage loan product used by many of the American people, known as the interest only loan.

Why did this long disappear? And why has it suddenly reappeared? Let's take a moment to answer each question, and hopefully provide some food for thought.

During the 1920s and into the early 30s, many of the citizenry of this country chose to live above their means. They chose the interest only loan because it allowed them to purchase a larger home for less money. What happened when the stock market crashed and jobs were scarce, and there was no income?

Many of these people were left without homes; as they had chosen to simply pay the interest on their mortgage there was no equity built into their homeownership. When no equity builds, and the income ceases, the bank forecloses and residents or forced from their homes.

During the Great Depression this happens to many homeowners. It was at this juncture that many landing institutions chose can remove this loan product from their offered products as it was simply too risky. But with the creation of the many mortgage products offered today, the interest only loan has made a return. And what a return!

Today the interest only loan market segment comprises some 30% of the entire loan market; a development of only four years. Prior to 2001 days only loan market was a 3% segment of the entire market; the exponential growth we've experienced has set new records not only for the mortgage market, but for many financial markets in general.

Add to this tremendous growth the also tremendous growth of the housing industry, and you have a very delicate situation.

But does the interest only loan good for the average consumer? Not very much, there are individuals who truly benefit from an interest only loan, but they fall into a very small category.

The greatest benefactors of interest only loan would-be investment individuals and young professional individuals who do not intend to retain their home for more than five years. How many of the actual mortgage applicants follow into this category?

Less than 5%, so how do we have only 5% of the population that actually qualifies for the interest only loan, and an interest only loan market of 30%?

We have these conflicting figures because not everyone that purchases in interest only loan truly benefits from an interest only loan. The mortgage lender is not concerned with the benefit of the product to the purchaser.

The mortgage lender is interested in the profitability of the product he or she has sold. And interest-only loan is a truly profitable product. In fact, the entire payment is a profit to the lending institution. Not one penny of the payment applies to principal for a specified term.

Interest only payments, generally comprise only five to seven years of the entire term of the loan. After the initial five to seven year interest only term, the consumer begins to pay greater payments that apply to both principal and interest.

As you can say this is truly not in the interest of the consumer, as most consumers do not begin to see a rise in income as quickly as they begin to see a rise in mortgage payment.

Investors who have a trying staff of financial advisers and lending specialists truly understand how to use an interest only loan in order to turn a profit, but there is where an investor is not a homeowner.

For homeowner has no interest in profitability, they are concerned with residency stability. They cannot afford to lose their home; an investor can afford to lose an investment.

As you can see, there may have been merit and validity to the decision to remove interest only loans from their product offering during the 20s and 30s; it's quite possible today, that we have lost sight of the devastation and destruction witnessed during the Great Depression.

Let's just hope the bubble doesn't burst. Interest only loans are encouraging borrowers to live at the limits of their means, and I don't think that's good for the borrower, the economy or the housing market. What happens to the homeowner, should the bubble burst?
About the Author
Uchenna Ani-Okoye is an internet marketing advisor and co founder of Free Affiliate Programs

For more information and resource links on home loans visit: Home Loan Lending
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