In the major metropolitan cities of the United States, the price of buying a home is skyrocketing. Potential homeowners are turning to new kinds of bank loans to help finance the high cost. In the past, many people took out 30-year loans with fixed interest rates. After 30 years, the debt is paid off.
Now there is a new type of loan called interest-only. The borrower only pays the interest on the loan for the first three to seven years they own their home.
Scott Bednas, a homebuyer, thinks this loan is right for him. "This allows monthly payments to be more easily made and more affordable."
However, after the initial grace period, the monthly payments increase by hundreds of dollars because the whole principal is still owed. That works well for borrowers who plan to sell their homes within the interest-only period for substantially more than what they paid for it. They will have enough money to pay off their mortgage and make a profit.
Robert Friedberg is a mortgage broker near San Francisco. "Risky for short term, no. But for long term, yes. I don't recommend people keep these types of loans for more than three to five years."
The investment becomes dangerous if the house should decrease in value. The borrowers are left owing money to the bank and if they default on the loan, they could lose their house. Analysts, such as Allen Fishbein of the Consumer Federation of America, believe housing prices are about as high as they can go and many people borrowing with interest-only loans could be in trouble.
"We feel these products are being sold, and maybe oversold, to borrowers that these products are not suitable for."