Interest only loan simply postpones day of reckoning
By Cathy Moran, California Bankruptcy Attorney on Nov 18, 2009 in Mortgage Issues In Bankruptcy
The client’s “plan” for the underwater house with a 10 year interest only loan is to file bankruptcy now, and plan on selling the house in a couple of years. Sound familiar? The homeowner has bought the same pitch that was made to folks with adjusting rate mortgages: “sure, you won’t be able to pay this loan off according to its terms, but you can sell or refi later at a profit.”
What we’ve learned from the subprime crisis is not evenly distributed throughout the populace, apparently.
My point of view is that the ability to sell a house in the foreseeable future that is underwater now assumes that home values increase significantly from their current point. That is the only way that a conventional sale of this property is possible.
If we don’t experience further growth in real property values, the client faces a short sale or foreclosure several years from now, added to the credit hit of a bankruptcy now.
For the life of me, I cannot see the advantage in overpaying now for housing and risking a further financial hit when the interest only mortgage rolls over to principal and interest.
Hope it was good Kool aid ’cause the client sure drank a lot of it.
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