These Loans Have Become Very Popular Lately

Category: Finance, Mortgages.

Did you know that the only way the mortgage industry stays in business is to keep you in debt? So the logical move for mortgage companies is to make it as easy as possible for you to borrow money.

If you pay off your mortgage, the mortgage company loses a customer and regular monthly income. Of course, the easiest way for them to make debt less" burdensome" on you is to get your monthly payments as low as possible. But now, the mortgage industry has made it even easier to stay in debt- - forever! For years, they relied on adjustable rate mortgages, which would get you in the loan at a low rate, only to balloon later when interest rates increased. The latest easy- money offerings for mortgages are called" interest- only" or" option- payment" loans. You don' t have to pay any principle.

Interest- only loans are aptly named, as they require you to pay only the interest acquired each month. So 30 years from now, you' ll still owe the exact same amount you owe today. With these loans, you have to pay only the minimum, like you would on a credit card. The option- payment loans are even more insidious. You can pay more, but almost nobody, of course does. The hope for the homeowner is that the house will appreciate faster than the interest. So 30 years from now, you' ll owe a lot more than what you started with, because the minimum payment is usually lower than the interest you accrue each month.

But most people will find themselves upside down( owing more than the house is worth) on the loan very quickly. In fact, Kenneth Harney from the Washington Post says that option- payment loans make up more than half the loans out there today. These loans have become very popular lately. Don' t kid yourself into thinking these loans are the easy road to financial independence. And jumping into one just to lower your monthly payments will cost you far more in the long run. They are an insidious trap.

Your goal should be to pay off your home mortgage as fast as possible. The safest loans out there are fixed loans for 30 years or less and adjustable rate mortgages that fit your timetable. You don' t want a never- ending mortgage. If you plan to own a home for less than five years, then a 5- year ARM would make sense. I know the traditional loans aren' t sexy, but you won' t lose nearly as much money over the long haul. But the" interest- only" and" option- payment" loans are only for very special circumstances that regular homeowners will never need. If you can' t afford the payment using one of these loans, buy a smaller home.

It's simple, stewardship, but wise.