The interest-only loan you can get now is the same one that many Americans have used since the 1920s. So, your grandparents or their parents may have taken out an interest-only loan to help them get out of debt.
There were some changes to loans between then and now, though. Let's look at some of the ways they are different. This might help us learn more about these loans so we can shop for them better.
In the 1920s, interest-only loans were more of a pure product, which means that they only charged interest for the life of the loan. So, only the interest had been paid and none of the principal. This seemed like a good plan until the stock market crashed, which led to the Great Depression. This left a number of lending companies with a foreclosed mortgage and no money. At this point, most lenders decided that it would be better to just give out more traditional loans so that equity could be built up. This gave the homeowner a way to save money and grow their wealth. It also helped the bankers because their mortgage balances were less than they had been before.
The interest-only loan of today is not good for everyone and can hurt many homeowners, but it is good for some, like investors who are likely to sell the property anyway, or people who plan to move soon and won't care that they aren't building equity in the home.
Now, when a lender offers an interest-only loan, they have to make sure that the interest portion doesn't take up more than half of the loan. This helps keep things from getting as bad as they did in the 1920s, when the stock market crashed. This type of mortgage is more likely to appeal to someone who shops too much and wants instant gratification but doesn't have good skills for managing debt.
This puts many borrowers in a situation where they own a home but don't have much equity in it. It also puts them in a position where they can't make the payments when the principal part of the loan comes due.
The growth of the real estate market and these kinds of loans have made it easier for many people who want to buy a home to make that dream come true. But every bubble has to burst at some point, and mortgage companies will have to feel the effects.
On the other hand, the buyer may not be able to handle the consequences if he or she says that the house is suddenly not worth the amount of the loan.
By far, the lender gets the most out of this loan, while the homeowner takes on most of the risk. Please use good money management skills and be very careful about the type of mortgage you choose.
