Interest Only Loans - A Ticking Bomb
Another tip of the hat to Ben Jones Housing Bubble...
Business Week quoting LoanPerformance statistics show:
The national share of mortgages that were interest-only shot up from 1.5% in 2001 to 6% in 2002, 13% in 2003, to 31% in 2004.
Regarding the percentage of interest-only loans per state, Georgia led the union with 50.4%, California was second, at 47.1%, Colorado third, at 45.5%, Nevada fourth, at 44.7%, the District of Columbia, fifth at 43.8%, Arizona sixth at 40.3% and Florida fell just below the national average at 30.6%.
From the Wall Street Journal: In California, interest-only loans accounted for 61 percent of the mortgages taken out to buy homes in the first two months of this year, up from 47.1 percent in 2004 and less than 2 percent in 2002.
Interest-only mortgages were designed for wealthy families who use the loans as cash-flow management tools and could, if necessary, pay off the entire sum by liquidating some stocks and bonds.
Trouble is, the numbers indicate that these loans are being taken out by a much bigger sector of the public: The people who are stretching beyond their means to desperately get into a escalating ponzi scheme and biting off way more than they could normally chew.
The bad news is that payments on a interest only can jump 50% when the interest only period ends, heres a generous and conservative example.
Assuming a buyer can afford $2120 per month and that INTEREST RATES DO NOT GO UP, and a down payment of 20% (ha-ha, chortle, guffaw, tee-hee, tither, chuckle, yeah right!):
With an adjustable-rate, principal-and-interest loan of $400,000 that is fixed for the first five years at 4.875%, the buyer can afford a $500,000 home.
With a adjustable-rate, interest-only (1st 10 years) loan of $496,000 that is fixed for the first five years at 5.125%, the buyer can afford a $620,000 home.
When principal payment begins in the 11th year, the payments jump from $2120 to $3310, thats a $1190 increase which is more that 50% extra.
And remember thats without rates rising and with 20% down and a 10 year interest only term. Imagine what happens with no down, rising rates and a 5 year or shorter interest only term. Can you say Notice of Default? I can.
Business Week quoting LoanPerformance statistics show:
The national share of mortgages that were interest-only shot up from 1.5% in 2001 to 6% in 2002, 13% in 2003, to 31% in 2004.
Regarding the percentage of interest-only loans per state, Georgia led the union with 50.4%, California was second, at 47.1%, Colorado third, at 45.5%, Nevada fourth, at 44.7%, the District of Columbia, fifth at 43.8%, Arizona sixth at 40.3% and Florida fell just below the national average at 30.6%.
From the Wall Street Journal: In California, interest-only loans accounted for 61 percent of the mortgages taken out to buy homes in the first two months of this year, up from 47.1 percent in 2004 and less than 2 percent in 2002.
Interest-only mortgages were designed for wealthy families who use the loans as cash-flow management tools and could, if necessary, pay off the entire sum by liquidating some stocks and bonds.
Trouble is, the numbers indicate that these loans are being taken out by a much bigger sector of the public: The people who are stretching beyond their means to desperately get into a escalating ponzi scheme and biting off way more than they could normally chew.
The bad news is that payments on a interest only can jump 50% when the interest only period ends, heres a generous and conservative example.
Assuming a buyer can afford $2120 per month and that INTEREST RATES DO NOT GO UP, and a down payment of 20% (ha-ha, chortle, guffaw, tee-hee, tither, chuckle, yeah right!):
With an adjustable-rate, principal-and-interest loan of $400,000 that is fixed for the first five years at 4.875%, the buyer can afford a $500,000 home.
With a adjustable-rate, interest-only (1st 10 years) loan of $496,000 that is fixed for the first five years at 5.125%, the buyer can afford a $620,000 home.
When principal payment begins in the 11th year, the payments jump from $2120 to $3310, thats a $1190 increase which is more that 50% extra.
And remember thats without rates rising and with 20% down and a 10 year interest only term. Imagine what happens with no down, rising rates and a 5 year or shorter interest only term. Can you say Notice of Default? I can.
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