Let's Classify this Under the 'Duh' Department

From Do financial homework before taking mortgage

Most interest-only payment plans are offered on adjustable-rate mortgages, but they can also be found on fixed-rate loans. "The name is misleading," says Keith Gumbinger, a vice president and analyst at HSH Associates, a mortgage-information publisher. "There is no such thing as an interest-only mortgage because eventually youll have to pay the loan principal as well. The standard payment on a 6 percent, 30-year $100,000 loan is about $600," he says. Of that, $500 is interest. "So if you opt for an interest-only loan," he says, "you're reducing your payment by only $100 a month and youre not building equity."

Well, duh. The mortgages are called interest-only for a reason, no? And might that reason be because you are paying not your principal, but, rather, interest only? What's especially devious are these negative amortization loans, which allow you to make payments so small that you're actually losing ground each month, owing more each month than you did the previous month. (Of course, eventually the debt-to-valuation ratio becomes too great and the mortgage automatically switches over to a more conventional fixed-rate mortgage, thereby brining in dramatic increases to the monthly costs... but we're credit-hungry Americans, remember, and price things in terms of "How much down, and how much per month?"

"Everybody is betting on the future that were going to have these big price appreciations in housing, that were all going to get big raises," says Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co. "What if you dont get promoted? What if you dont get a raise? What if your house doesnt appreciate?" He and other mortgage experts say interest-only mortgages are best suited for home buyers who plan to move before the principal comes due, for those who expect their incomes to rise strongly over time, and for those who get the bulk of their income in bonuses.

Guess what, Mr. and Mrs. Average American - that ain't you! Personally, I have a 30-year fixed mortgage, but since listening to Dave Ramsey I wish I had taken a 15-year loan. No worries, though, I'm paying down additional amounts on the principal each month, but I still can't fathom those who do these 10-year I/O loans, especially considering that we're now enjoying the lowest interest rates in modern history. That means there's only one way interest rates can go - up.

Like interest-only mortgages, so-called option adjustable-rate mortgages are enjoying a surge in popularity. But these, too, require caution, the experts say. "This kind of mortgage gives borrowers the option to pay less than the interest charged on their loans by deferring part of that payment and adding it to the original loan balance. The lure is a lower payment. On the other hand, if you choose that option, you will end up owing more than your original balance. Why would you take a loan product that goes backwards?" Jarrell asks. "That's just insane. There are also mortgage products that allow you to put nothing down, which also slow your ability to accumulate equity."

"That's just insnae." Couldn't have put it better myself.

I pity those recent homebuyers that decided to go via the I/O or ARM route for a home they could ill afford. I feel sorry for those who decided to finance 100% or 110% of their house purchase, or those that used a credit card or other foolhearty approach to make a down payment. Your day of reckoning is coming, I'm afraid. At the risk of sounding selfish, I'm hoping that there's enough people who fell into this trap to bring house prices down to realistic levels, and enough financially sane people to keep our world's economy afloat through what is bound to be some troubling times ahead.