Think interest-only mortgages are bad?

How about “[a]n interest-only, payment skipping/minimum-payment-option-enabled, negatively amortizing, no-money-down, no documentation, prepayment-penalizing, 3-month LIBOR 40-year adjustable-rate mortgage with a balloon?”

Let’s break this down, shall we?

Interest-only means that you’re not paying down the principal, the mechanism by which you reduce what you owe to the lender;
Payment skipping means that any interest you would have paid gets tacked on to your principal, so you owe more;
Negatively amortizing is another form of paying less than the interest due;
No money down means that you’re borrowing the down-payment or paying private mortgage insurance because you’re borrowing for more than 80% of the home’s value;
No documentation means less paperwork and less need to prove that you actually can afford the loan, but they’ll slap on a prepayment penalty and/or a balloon payment to offset their risk;
Prepayment-penalizing means that there’s a minimum interest payment due to the lender, regardless of how quickly the loan is paid off;
3-month LIBOR or London Inter-Bank Offer Rate is a constantly fluctuating rate, so for the borrower there is almost immediate interest rate risk;
40-year means 40-year amortization and a lot more interest payments weighted toward the front of the loan than a 30-year or 15-year;
Adjustable rate means the borrower is not protected against interest rate rises;
Balloon means a lump sum due not too far off into the future — the borrower needs to find this later, possibly when interest rates are not so favorable.

Sure, you could pay $1 a month for the first few months and party it up in your new million-dollar home, but the punch bowl is taken away very quickly by the lenders, and you’ll be stuck with nothing but a financial hangover and death by foreclosure.

By the way, just in case you actually wanted one of these loans, no lenders are currently offering it. It’s a concoction of the writers at Bankrate.com in “The World’s Worst Mortgage” at MSN Money.

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One Response to “Think interest-only mortgages are bad?”
By montyloree on Aug 5, 2005 | Reply

Nice definitions. When I visited San Francisco, I was introduced to alot of these terminologies as the price of properties were sky high. I couldn’t believe you would have an interest only mortage.

These are valuable definitions. Thanks