| "When the price of houses in California soared 17 | | | | win a house, a buyer often needs to pay a third over |
| percent in 2003 and 22 percent in 2004, a curious thing | | | | the asking price. A four-bedroom Berkeley house went |
| happened: Instead of homeownership decreasing | | | | on the market in February for $985,000 and promptly |
| because fewer people could afford houses, it rose to | | | | sold for $1.5 million. "If property values continue to rise, |
| record levels," shows an article in the LA Times. In his | | | | the interest only homeowner builds equity in the home |
| LA Times article, writer David Streitfeld links the rise of | | | | without paying down any principal. |
| home prices and home ownership to one thing. | | | | In a surging housing market, the gamble is quite |
| The interest only mortgage: | | | | lucrative...pay interest only for 10 years, allow the |
| Interest only mortgages give homeowners the option | | | | market value to appreciate, gain equity without paying |
| to pay only the interest of the loan for a specified time | | | | any principal, then refinance or sell to get the return |
| period, usually 3,5,7, 10 or 15 years. Since the first few | | | | from your investment. But if the FMV of the home |
| years of any home loan are mostly interest anyway, | | | | doesn't appreciate or actually depreciates, |
| the loans are actually designed to allow home owners | | | | homeowners could get stuck in an unfortunate |
| to put away the extra cash. At the end of the initial | | | | situation. |
| interest only period, the loan then converts to a fully | | | | "Of course, there's never a guarantee that prices will |
| amortized loan. | | | | appreciate. And if you stay in the house longer than |
| For example, the monthly payment of a standard 30 | | | | you planned, your monthly payment jumps drastically |
| year mortgage at 6.25% would cost $1231 per month, | | | | after your five-year honeymoon period. Suddenly you |
| the same loan at interest only costs $791. | | | | have to pay principal on the loan, and most likely at a |
| In California's housing market, home buyers are | | | | higher rate. If your rate goes to 7 percent for the life |
| affording more home because of the interest only loan. | | | | of the loan (and there's nothing stopping it from going |
| They are playing the buy know, pay later game. The | | | | higher), your payments will nearly double to $1,413." |
| lower payments of the interest only loan allow buyers | | | | "In the most dire scenario, if they owe more on the |
| to afford more home for less. "The notion of prices | | | | home than it's worth, they'll simply walk away. |
| falling in California goes so contrary to the current | | | | Abundant foreclosures could spark a downturn in the |
| environment it's almost laughable. In the San Francisco | | | | entire housing market, leading to the long-feared |
| Bay Area, probably the state's strongest market, its | | | | bursting of what some call a housing bubble," shows |
| routine for houses to get more than a dozen bids. To | | | | Streitfeld's LA Times article. |