December 21, 2005

The nightmare of an interest-only loan - and we're just getting started


Doesn't it seem like the same guys in this interest-only business are in the payday loan business too?

It used to be called loan sharking. Preying on the uneducated, gullible masses.

These rates (and payments) will continue to climb in 2006, causing more and more inventory to hit the market as desperate homeowners who can't afford their higher payments dump houses on the market to get whatever they can and get out.

Hat-tip to Dusty for the article.

Steve Clerman decided to refinance his townhouse in Montgomery Village back in 2003. One offer jumped out at him from the flood of loan solicitations that arrived in his mailbox, and he signed up for an interest-only, adjustable-rate mortgage.

It was a relatively new type of loan, tempting to him and a growing number of people because it required very low monthly payments in its early years, since none of the money was used to pay off the loan's principal.

Now, though, Clerman feels trapped in a mortgage he says he didn't understand. In the past year, his interest rate has risen from 4.5 percent to 6.5 percent, and it is likely to head higher. Meanwhile, he has just looked at the loan's fine print and realized that he is locked into it for five years: If he tries to refinance or sell the home during that period, he owes the lender a $4,900 pre-payment penalty.

"I think I'm going to sell and get whatever I can for it," said Clerman, 50, an insurance salesman. "I'm in a really lousy mortgage."

7 comments:

Out at the peak said...

I saw an ad today by Quicken Loans. They dubbed it Smart Choice(tm). Educated people would know that it is negative amortization when you select the minimum payment. They showed an $200K loan example in comparison to a 30 yr fixed. Then their conclusion was a "savings of $5700 a year." People were smiling saying how great it is...

blogger said...

that graph will make a nice appendix entry for the harvard business school's class project in 2012 on the 2000 - 2005 worldwide housing bubble causes and effects.

without that easy money, we wouldn't have had the bubble blow up as big as it did.

With that easy money, we got a historical bubble, and then now, here comes the historical burst.

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