I think it is important to point out that not every one has the same views on money and just because someone’s view is different from yours, does not make it wrong. When it comes to financing, loans products such as interest only, negative amortization, stated income, and no doc have been around for a while and each serves a purpose. The concern lies with the number of people that are currently using these products. We all receive the postcards in the mail regarding refinancing to a 1% interest rate with little to no disclosure regarding the type of loan that it is. For clarification purposes, an interest only loan is a 30 year loan that allows the borrower to pay only interest for a certain period of time. A negative amortization loan allows the borrower to pay less than the interest owed. The interest that is not paid is added on to the loan and becomes additional principal owed. The loan balance actually grows with time.
Having one of the loan products above does not mean that the borrower cannot afford their payments. Some people with interest only loans place the amount that they would have paid toward principal in other investments where their return is greater than the interest rate that they are paying to borrow the money. And some people use neg am loans for cash flow purposes. The problem is that many people are in neg am loans because that minimum payment is all they can afford to pay.
I don’t think that any of us can look at the type of mortgage that someone has and make a judgement regarding their financial well-being without knowing more regarding their total financial picture. While I agree that the popularity of these loans has become a concern, I believe that each serves a purpose to the group for which it was intended and just because someone has one of these loans does not make them a financial trainwreck.
