Interest Only Mortgage Hucksters Compound Mortgage Crisis

Author: Rob K. Blake | Date: September 24, 2008 | Filed In: Mortgages

Companies who constantly peddled the interest only mortgage are now a being revealed as contributing to the mortgage crisis and the rise in foreclosures. Quicken Loans offered their version of the interest only mortgage stressing the “savings” over fully amortized options calling it a “Smart Loan”.

Ha!

Interest Only Mortgage - Are They Smart Loans?

Hardly!

Interest only mortgages sacrifice principal reduction in favor of a smaller payment. As the name suggests, a borrower only pays interest with each monthly payment. Click the link for our glossary term, Interest Only Mortgage.

It is fairly understandable how easy this would be to sell and sell it they did. TV commercials ran non-stop with borrowers who saved “$6,000 a year” just switching to a “Smart Loan”. I can remember toward the end of the refinance boom, this type of pitch was the only way for lenders to keep up their application volume.

So what’s wrong with saving $6,000 a year, you ask?

It comes at a price. What the TV ads and interest only loan sellers neglected to mention was the risk involved..the fine print if you will.

You see…this loan took many folks out of a fixed rate 30 year loan and replaced a safe loan with an adjustable rate mortgage or ARM. That’s what the TV ads failed to mention.

Interest only mortgages at the time were all adjustable rate mortgages. Of course, if they put that little tidbit in the ads, the phones wouldn’t ring.

We all know how ARMs once they recast to a higher rate and payment can throw an unprepared home owner into foreclosure rather easily. Many of the current foreclosure home owners fell victim to these “Smart Loans” once the initial fixed rate and the “interest only” period ended simultaneously, hitting the homeowner with a huge payment increase.

This recasting interest only mortgage “double whammy” simply made previously affordable homes unaffordable. Add that many folks saw their home lose value to the point they could not refinance their way out of the mess, a foreclosure was a foregone conclusion.

So I must say, “Thanks Quicken Loans for your hard sell of the interest only mortgage and for contributing to the foreclosure crisis.”

Good Luck!