Mar 19th, 2008
Interest Only ARM - The STD of Mortgages
It may have seemed like a good idea at the time, but it you will pay for it long term.
Ah yes, the cancer that is Interest only ARMs. So for those of you who aren’t quite sure what it is:
An interest only ARM is an ARM (Adjustable Rate Mortgage) where for a set amount of time the borrower pays only the interest on the principal balance, with the principal not being paid down at all.
Several years ago banks went kind of crazy lending and started handing out ARMs like they were on a mission. Well, they were on a mission - lend to as many people as possible, regardless of whether those people could afford it or not. That in and of itself means big trouble but at least homeowners could build some equity in that time.
This is where the interest only ARM came in. Interest only ARMs are the same concept except that homeowners (and I use that word loosely) only pay interest on the principal - basically banking on their home appreciating. There is one major problem, housing prices were very inflated and so now we have people with houses they couldn’t afford in the first place with their interest rates resetting to high rates while they have effectively LOST equity in their houses.
I heard one guy call into talk radio and say he has three houses with interest only ARMs that he bought assuming he could flip them but now he cant even sell them below market value…and he is about to foreclose on all three.
Here is the lesson, I want all of you readers to make me this promise: “I reader hereby do solemnly swear that I will not get an interest only ARM or an ARM of any kind for that matter and I will tell my kids to never get an ARM too.”
- One Comment
- Home and Home Improvement
When the flipping market’s in trouble, then there’s just no point for them. I can see the attraction if you’d rather spend your capital on fixing up the house than on traditional mortgages if you’re only going to spend a few months with the house.
But that’s the only thing I think they’re possibly good for. And if the flipping market is down, then they’re not good for anything.
(I don’t like IOs anyway, because there’s no principle.)
However, the worst kind is an IO ARM that allows for negative amortization (i.e. you don’t even pay off all the interest every month and therefore your debt goes up).