Depression Era Loans Back In Style
The professor who wrote this BankRate editorial isn't against interest only loans, but he makes a compelling case for abolishing them. "Interest-only mortgages were the standard mortgage in the 1920s, but they disappeared during the Great Depression, and for good reason."
"The drop in real estate values during the Depression pushed a large proportion of interest-only loans into foreclosure. Lenders switched entirely to fully amortizing loans, and that has been the standard mortgage loan since."
"The big change in the risk of IOs, relative to the '20s version, is their attachment to adjustable-rate mortgages, or ARMs. ARMs are risky in themselves because borrowers are exposed to rising mortgage rates when market rates increase. Adding an interest-only feature heightens the risk."
"Adding an interest-only period to ARMs opened the door to a variety of merchandising gimmicks based on an ingenious piece of misdirection: IOs are presented as a new type of mortgage, with lower rates than standard fixed-rate mortgages."