Many consumers associate interest only loans with the downfall of the real estate industry but its far from true. Interest only loans in their true form were not part of the option arm or “choose a payment” loans offered to many consumers during the housing boom. Sure, these loans had an “interest only” payment option attached to them but it was certainly almost always higher than the minimum payment due on the monthly statement and in true form, most consumers simply pay minimum payments in life.
Historically interest only mortgage loans were available only through financial firms interested in providing attractive alternative mortgage programs for the wealthy.
For example – a wealthy investor who wanted to purchase a home could opt to pay principal or use that money to earn greater returns elsewhere. Having an interest only payment option provided greater liquidity as the payment was lower and that investor could now use the “principal” funds to try and achieve greater returns elsewhere. The catch was most of these clients could afford above and beyond the interest only payment so repayment was never an issue.
Additionally, the most popular interest only loans (before the rush of these products to Main Street) was a fixed rate for a generous portion of the loan term – 5 or 10 to exact.
No 4 payment options, no negative amortization, no minimum payment options – just a straight up, pay your interest every month and move on type of loan.
These loan programs are still very popular but thankfully they have moved back to where they belong – educated people well equipped to handle their finances and who understand math.
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