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When a Cheap Mortgage Is Too Expensive

Aug 18, 2007
Did you know that the only way the mortgage industry stays in business is to keep you in debt? If you pay off your mortgage, the mortgage company loses a customer and regular monthly income. So the logical move for mortgage companies is to make it as easy as possible for you to borrow money.

Of course, the easiest way for them to make debt less "burdensome" on you is to get your monthly payments as low as possible. For years, they relied on adjustable rate mortgages, which would get you in the loan at a low rate, only to balloon later when interest rates increased. But now, the mortgage industry has made it even easier to stay in debt -- forever!

The latest easy-money offerings for mortgages are called "interest-only" or "option-payment" loans. Interest-only loans are aptly named, as they require you to pay only the interest acquired each month. You don't have to pay any principle. So 30 years from now, you'll still owe the exact same amount you owe today.

The option-payment loans are even more insidious. With these loans, you have to pay only the minimum, like you would on a credit card. You can pay more, of course, but almost nobody does. So 30 years from now, you'll owe a lot more than what you started with, because the minimum payment is usually lower than the interest you accrue each month. The hope for the homeowner is that the house will appreciate faster than the interest. But most people will find themselves upside down (owing more than the house is worth) on the loan very quickly.

These loans have become very popular lately. In fact, Kenneth Harney from the Washington Post says that option-payment loans make up more than half the loans out there today.

Don't kid yourself into thinking these loans are the easy road to financial independence. They are an insidious trap. And jumping into one just to lower your monthly payments will cost you far more in the long run. Your goal should be to pay off your home mortgage as fast as possible. You don't want a never-ending mortgage.

The safest loans out there are fixed loans for 30 years or less and adjustable rate mortgages that fit your timetable. If you plan to own a home for less than five years, then a 5-year ARM would make sense. But the "interest-only" and "option-payment" loans are only for very special circumstances that regular homeowners will never need.

I know the traditional loans aren't sexy, but you won't lose nearly as much money over the long haul. If you can't afford the payment using one of these loans, buy a smaller home. It's simple, but wise, stewardship.
About the Author
Steve Kroening writes for Success magazine and also publishes Wisdom's Edge. You can get Biblical tips on health, finance, relationships, parenting, and success, delivered to your email inbox every week. Simply visit http://www.wisdomsedge.com and sign up for this free e-zine.
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