There was a mortgage loan product used by many of the American people, known as the interest only loan before the depression of the 1920s.
What is the reason for disappearance of this loan for long period? And why has it suddenly came back? In order to answer the question, let's take a moment, and give some thought for your mind.
Many of the citizenry of this country chose to live above their means during the 1920s and into the early 30s. They opted for the interest only loan since it allowed them to purchase a larger home for less money.
What had taken place when the stock market crashed and jobs were scarce, and there was no income?
Many of these people were left devoid of homes; as they had chosen to pay the interest simply on their mortgage there was no equity built into their homeownership. The bank forecloses and residents or forced from their homes when no equity builds, and the income ceases.
This happens to many homeowners during the Great Depression. It was at this point in time that many landing institutions chose can remove this loan product from their offered products as it was simply too unsafe.
But the interest only loan has made a return with the creation of the many mortgage products offered today. And what a come back!
But for the average consumer, does the interest only loan good? Not greatly. From interest only loan, there are individuals who truly benefit from, but they fall into a very small category.
Investment individuals and young professional individuals who do not intend to retain their home for more than five years would be the greatest supporters of interest only loan.
How many of the actual mortgage applicants follow into this category? Below 5%. So how do we have only 5% of the population that actually qualifies for the interest only loan, and an interest only loan market of 30%?
Because not everyone that purchases in interest only loan truly benefits from an interest only loan we have these conflicting figures. The mortgage lender is not concerned with the benefit of the product to the purchaser.
The mortgage lender is interested in the productivity of the product he or she has sold. And interest-only loan is a truly profitable product. Actually, the entire payment is a benefit to the lending institution. Not one penny of the payment applies to principal for a specified term.
Interest only payments, generally contain only five to seven years of the entire term of the loan. The consumer begins to pay greater payments that apply to both principal and interest after the first five to seven year interest only term.
As most consumers do not begin to see a rise in income as quickly as they begin to see a rise in mortgage payment, you can say this is truly not in the interest of the consumer.
In order to turn a profit, investors who have a trying staff of financial advisers and lending specialists truly understand how to use an interest only loan, but there is where an investor is not a homeowner.
For homeowner has no interest in profitability, they are concerned with residency stability. They cannot afford to lose their home; an investor can afford to lose an investment.
There may have been merit and validity to the decision as you can see to remove interest only loans from their product offering during the 20s and 30s; it's quite possible today, that we have lost sight of the devastation and destruction witnessed throughout the Great Depression.
Let's just hope the bubble doesn't burst. Interest only loans are encouraging borrowers to live at the limits of their means, and I don't think that's good for the borrower, the economy or the housing market. What happens to the homeowner, should the bubble burst?
Today the interest only loan market segment comprises some 30% of the entire loan market; a development of only four years.
Before 2001 days, only loan market was a 3% segment of the entire market; the exponential growth we've experienced has set new records not only for the mortgage market, but also for many financial markets in general.
Included to this tremendous growth the also tremendous growth of the housing industry and you have a very delicate situation.
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