There's been quite a bit of talk over the exotic loans and their affects on homeowners' equity lately. The more "leveling" we see in home values and prices over the next few years will have a great impact on how the loans will affect the borrower, and their ability to pay off the mortgage. Combine the "correcting" home values with the lack of payments toward the principal amount, factor in the borrowers' stretched incomes, and you have a recipe for disaster.
The interest only or I/O loan was originally set up and geared towards someone who is financially set and well prepared for the purchase of a home. However, many borrowers "stretched their buying power" with the interest loan, using the bulk of their monthly income to pay the mortgage payments. People who would not otherwise have qualified for a loan - instantly became qualified. The changes and adjustments that the rates may bring, added to the fact that many of these loans are in areas with inflated housing prices, may cause many homeowners to lose their homes and walk away with nothing due to lack of equity built up during the I/O period.
I watched a home go from $250K skyrocket to a range of $450k to $500k in just two years, then "corrected" back down to $350,000 in just a few months. If during that time a buyer "stretched" their buying limits to afford the home at $450k, in less than six months they are owing $100,000 more than the home can sell for, and with rising rates - possibly a mortgage they are no longer comfortable with. Of course, don't forget - there's relatively no equity built up in the first few years, and none for the first 10 years if the borrower obtained an interest only mortgage. Just a hypothetical - yet very real example.
The interest only or I/O loan was originally set up and geared towards someone who is financially set and well prepared for the purchase of a home. However, many borrowers "stretched their buying power" with the interest loan, using the bulk of their monthly income to pay the mortgage payments. People who would not otherwise have qualified for a loan - instantly became qualified. The changes and adjustments that the rates may bring, added to the fact that many of these loans are in areas with inflated housing prices, may cause many homeowners to lose their homes and walk away with nothing due to lack of equity built up during the I/O period.
I watched a home go from $250K skyrocket to a range of $450k to $500k in just two years, then "corrected" back down to $350,000 in just a few months. If during that time a buyer "stretched" their buying limits to afford the home at $450k, in less than six months they are owing $100,000 more than the home can sell for, and with rising rates - possibly a mortgage they are no longer comfortable with. Of course, don't forget - there's relatively no equity built up in the first few years, and none for the first 10 years if the borrower obtained an interest only mortgage. Just a hypothetical - yet very real example.
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