Will an Interest Only Mortgage Lead to Foreclosure
It certainly is no secret that the real estate market has been on fire. It was fast, busy, and competitive. Most people have been able to count on their home selling not long after being placed on the market. This level of success has not been across the board, though. There are many, MANY households that are facing foreclosure in record numbers. Could these homeowners have been saved the trouble and heartache?
The simple answer is, possibly. There are a scary number of homeowners that fell victim to “less than reputable” lending plans and firms who presented them with attractive financing options. Once such option is interest only loans. These kinds of loans leave borrowers with very little equity in their home when they find themselves needing to refinance or the need to secure a second loan to save them from foreclosure. Simply put, no equity equals no collateral. Consequentially, foreclosure soon followed.
How does an interest only mortgage loan work? Simply put one monthly payment is exactly the amount of interest accrued so far on the loan. NO principal is touched. This can last a SHOCKING five to ten years on the loan! Borrowers can absolutely make extra payments, but here’s the catch. Those extra payments only go into future interest payments. NOT THE PRINCIPAL!
Let me show you some numbers. if you got a mortgage for $100,000 in 2023 with an interest only option for 10 years, in 2043 you would STILL have a balance of $100,000. Doesn’t that hurt to think about? Not to mention, foreclosure is an even more real fear. If it becomes difficult to make payments and the borrower finds themselves knocking on the door of foreclosure the threat of foreclosure.
The general rule of thumb is that interest only loans should not be considered unless you know for a fact that your earning power five to ten months down the road will greatly increase and your outstanding bills will decrease.
Then the risk of paying a little bit now and a lot later isn’t as great and you won’t be as “at risk” of foreclosure.
