Listening to Myself

Wednesday, April 13, 2005


From an article in the Contra Costa Times...

In 2001, as the housing boom got under way, fewer than 2 percent of California homes were bought with interest-only loans, according to an analysis done for the Los Angeles Times by LoanPerformance, a San Francisco mortgage research firm.

By last year, the level had risen to 48 percent. Nationally, LoanPerformance says, interest-only loans were used in about a third of all purchases.

What are these people thinking??

They give an example of a woman in her early thirties who will not pay into the principle of her home for 3 years. She put nothing down, and financed the entire cost of the home with an interest only loan. Not only that, she's hoping her condo goes up in value so that she can use the equity to pay down her credit card debt. In three years, when she has to start paying down the principle, her loan payment could go up by a third. What a disaster in the making! I just can't understand why someone would think this was a sound financial decision.

The article goes on to speculate that as people start having to pay into the principle for their homes, or when interest rates rise enough to cause payments on adjustable rate mortgages to rise significantly, we could see a large increase on the rate of mortgage defaults, forclosures, and people just walking away from homes that they don't have any equity in. I wonder what that'll do to people's credit ratings!

Or maybe all property will just keep going up 10-20% a year forever, and we'll just continue to get more complicated and more risky financing schemes so that people can afford it. I read the other day about lenders starting to offer 35 and 40 year mortgages...


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