Home Owners Increasingly Betting on Interest-Only Loans

Home Owners Increasingly Betting on Interest-Only Loans

July 12, 2005 NPR

3 minutes 48 seconds

Thoughtful discussion of the pros and cons of interest-only mortgage loans. Useful for a Money & Banking or Finance class, or even a principles class where the instructor was willing to spend a little time making sure the students understood the discussion.

Interest-only loans include no principal payment in the mortgage payment for the first few years of the loan. They also tend to have a lower interest rate. Both of these factors allow the monthly payment to be lower than a traditional mortgage payment for the same loan amount. Interest-only loans can be a good idea for people who expect their income to grow substantially in the future. They are not a good idea for people who are stretching to make that payment and have no expectation of higher income in the future, since the mortgage payment will rise dramatically when the principal comes due. Note also that if home prices fall, this turns into a negative equity loan, so that borrowers end up owing more than the home is now worth.

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