My Financial Healthcheck

Interest only mortgage and home equity loans are the next ticking time bomb that could greatly effect the financial markets and individuals finances. Interest only loans first came into place less than 10 years ago, and were highly successful as far as usage goes. The typical interest only loan allows one the ability to only pay interest each month on their mortgage, the option to pay the principal is offered. By paying principal one amortizes their loan which is the only pay to one day pay it off.  Most people that have interest only loans do not take advantage of the option to keep current with the principal.

A $100,000 loan at 6% with using interest only has a monthly payment of $500.00, the amortized amount would be $599.55, most interest only loans have the option of paying just the interest for 10 years. After the interest only period is over the loan will typically term out as a 20 year amortized loan. That same payment for the $100,000 loan where no interest was paid during the first ten year period would now have a payment $716.43 assuming it was a fixed rate loan. This payment increase would be enough for many people to have trouble making the payment on time, and considering most mortgages on the East or West Coast are in the $200,000 range, that extra payment increase with cause many mortgage defaults.

The most popular loan in the past 5-7 years was a Limited Documentation interest only loan, that had an arm product where the arm maturity was anywhere from 3-10 years. Those that had these products and still need the Limited Doc type loan to qualify will not be able to refinance since the Limited Doc programs do not exist for the most part anymore.  Once the indexes that these loans were tied to go up and the rates increase, so will the delinquencies, and thus foreclosures will result.  Its just a matter of time..