Tuesday, July 12, 2005

NPR : Home Owners Increasingly Betting on Interest-Only Loans

Only time will tell whether these interest only loans are more evidence of a real estate bubble, impatient buyers, or just a good example of financial innovation, but regardless, the link is interesting.

The short version is that Interest-Only loans are becoming increasingly popular. Moreover, they are not just popular for those who can not afford to pay the principle. There are of course downsides of these loans (especially if the market reverses its upward trends), but these loans do allow people to buy homes that otherwise may not be able. That said, I can only see a few isolated cases where I would ever recommend this type of financing--namely if you knwo your cash flows (earnings) will escalate quickly.

NPR : Home Owners Increasingly Betting on Interest-Only Loans

For more on the dangers of this type of loan (whatever you do, do not tell him it is a mortgage!!), check out the MortgageProfessor.com. Really. It is by "Jack M. Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, and Chairman of GHR Systems, Inc., a mortgage technology company."

BTW If you are teaching a class that deals with types of loans (Money and Banking, Financial Institutions, Introductory Finance, or Personal Finance come to mind), you will be interested in this audio presentation from NPR. It is definitely not too difficult for the students to understand!


Dan Meyer said...

In a June 27 postcard in my Tick Marks blog; I tried to give an example of one of the limited circumstances where an interest-only loan might make sense. Basically, it involved getting a special promotinal loan rate from the lender and disciplining yourself to make principal payments like the loan was a traditional mortgage loan.

FinanceProfessor said...

True...I had not thought of that. Of course it assumes the borrower will have the discipline to make the payments ;)

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