Interest-only mortgage home loan is for the affluent borrowers only- how do you justify this statement?

Asked by Robert Half, California Thu Sep 5, 2013

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Thierry Abel’s answer
Thierry Abel, Mortgage Broker Or Lender, Corte Madera, CA
Thu Sep 5, 2013
I do not think that "Interest-Only" loans are for affluent borrowers only, but I am sure that a lot of homeowners have become affluent using an "Interest-Only" loan and investing on their own instead of paying of their mortgage....Remember....Compounding Interest is a BEAUTIFUL thing
1 vote
Bob Willett, , Sacramento, CA
Fri Sep 6, 2013
I think that may be accurate at some level, but it’s really a pretty stupid statement to make. Interest-only and even negatively amortizing loans do have a place in the market, and their absence is having a negative effect on today’s market.

The problem with those type of loans is they are very dangerous in the wrong hands they can have huge negative consequences. The people that I have worked with that were attracted to the negatively amortizing loans, etc. typically had inconsistent income. This would be self-employed people, general partners, commission only sales people, and people that have incomes affected by seasonal factors. These people benefit from having a smaller regular or required payment for these times when the cash-flow is low, but then can make significant principle payments when the cash is there. I think this is where the “affluent borrower” label comes in; the reality is incomes that are less regular are also typically much greater as well. Interest-only or negativity amortizing loans given to borrowers who just want lower payment is a disaster in the making.

A few examples of borrowers I’ve done these type of loans for are: 1) a lawyer who took a draw of $40,000 a year as a partner but whose partnership distribution was in the mid six-figures, 2) a business owner whose business ran in the red for 10 months out of the year but made well over $200,000 during the Christmas shopping season, and 3) a high-steel construction worker who made over $150 an hour but would go long periods of no income when the weather was bad; he still made over $100,000 a year.
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2 votes
Daniel Lehman, , San Diego County, CA
Thu Sep 5, 2013
Interest Only Mortgages are not only for the affluent, but they are only for those who understand them, and have a plan going into them. Typically to reinvest the "principal" portion in a vehicle that is safe, provides a Rate of Return, increased tax benefits, etc.

Its not coincidence that people that understand money become affluent.

Daniel Lehman
2 votes
Media Fettin…, Agent, San Diego, CA
Thu Sep 5, 2013
Hello Robert,

That is a very astute question. Any statement can be all just depends on perspective. I hope you find what it is you're looking for. Let me know if I can be of help in some way.

Warm Regards,

Media Fettinger
Century 21 Award
2 votes
really good
Flag Thu Sep 5, 2013
Carl Snyder, Mortgage Broker Or Lender, San Diego, CA
Thu Sep 5, 2013
Affluent or nimble - the interest only loan is eventually a hot potato and one must be able to either
pay the rate when it adjusts to a fully amortizing loan over the remaining period, or
have either of 2 exit strategies in place:
1. Nimble: Sell the property regardless of profit or loss, or
2. Affluent: the ability to pay off the mortgage

The remaining option of re-financing the property is subject to several uncontrollable variables, not the least of which is the ability to qualify at current rates.
With these considerations in mind, I think it more accurate to characterize the effective use of the interest only loan as the domain of the sophisticated and experienced real estate operator than of one who is necessarily truly affluent.
2 votes
Andrew Marti…, Mortgage Broker Or Lender, Orangevale, CA
Fri Sep 6, 2013

Not sure that this statement is justifiable. I am of the opinion this is a false statement and cant be justified. ;o)
1 vote
Flag Fri Sep 6, 2013
Hi Andrew,
How would you answer the question below.
"Are Interest Only Loans available to affluent borrowers? "
Flag Fri Sep 6, 2013
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