The core of the American Dream, especially for immigrants from the Caribbean, is to one day own a house. Usually, the sooner this dream is realized the sweeter it is for the individual.

As the demand for houses increased, a creative way was found to enable this dream, to be fulfilled. However, the creation -- Interest Only Mortgages -- has been turning a lot of these dreams to nightmares, with the increase in foreclosures across America.

With lenders constantly advertising “Great rates, no appraisal, no lender fee, and bad credit okay,” several people who were not necessarily in a position to own a home were lured into making purchases based on these friendly terms.

Interest-only mortgage loans are really an old product (popular back in the 1920’s) that have made a big comeback as mortgage lenders devise ways to turn rising home prices to their advantage. Basically, in the early years of a mortgage the borrower pays only the interest portion of the normal monthly payment for a set period, freeing up the amount that would normally go toward paying off the principal.

At the end of the interest-only period, the loan reverts to its original terms, with the monthly payments adjusted upward to reflect the full payment (principal plus interest) over the remaining years of the loan. (For example, following a five-year interest-only loan, a 30-year mortgage would now fully be repaid over 25 years).

Although these loans do not allow the borrower to build equity during the interest-only term, the loans are very popular as they help people to close on their dream house, which under other conditions, they might not be able to afford.

These loans also give the homeowner the chance to invest that extra cash that would have gone into the mortgage payment, thus being able to secure the cash flow when the real mortgage sets in. The stark implication here is that the homeowner is therefore young, and educated or talented enough, to earn an increase in income over the five-year interest-only payment term so that when the real mortgage sets in he/she can afford meeting the increase without setback. However, what statistics is showing is that many people well over the age of 45, without the ability to attract higher incomes, or maintain steady jobs, are the primary recipients of these loans and the ones jost unlikely to meet the increased payments.

This is exactly what happened in the 1920’s to 30’s. The basic assumption then, as is now, was that the interest-only payment system works well as long as the house does not lose value and the homeowner does not lose his job, and has the ability to pay through increase in salaries. Well, in the ‘30’s the Great Depression hit, resulting in rising foreclosures which made lenders stop writing interest-only loans.

Today, although there is no great depression in sight, too much creative financing has taken place with very sizeable loans being made to people who do not have the ability to sustain the true mortgage payment when the interest-only term ends, resulting in foreclosure, pain, heartache and the new “American Nightmare.”

There are also reported cases of irresponsible borrowers who have taken the cash available as a result of interest-only mortgages to spend lavishly on non-essentials. Others have claimed, as shown on a recent TV documentary, that they did not read the terms of the mortgage they received, thinking that terms of the interest-only loan was a joy forever.

Who is really at fault here? Lenders in a very aggressive and competitive market will always try very creative means to have a borrower take their loan. Whether it be 40-year mortgages, no-document, or interest-only loans; there is money available. And, they are even more creative mortgage brokers who will bend, shimmy and shake to ensure applicants get that loan.

The loan is every one’s responsibility although the ultimate duty lies with the borrower. The borrower must ensure before he or she closes that loan that he understands the terms and conditions of the loan fully. Hardly any one reads, or totally understands the legal mumbo-jumbo that comprises the thick mortgage document. So, the lender can produce a comprehensive summary sheet, setting out in basic language the terms of the loan, and go over these terms and conditions at closing.

Mortgage brokers must also take responsibility and act honestly to ensure that loans go to those with the ability and the potential to assume the full mortgage when the interest-only term expires. It is cruel to give a 35 or 40-year mortgage to a 55-year-old couple, with few working years left, no pension in sight, and no children to assume the mortgage after they retire. It is also cruel to give loans to people with poor education, little skills or talent, with little ability to increase their earnings to meet increased mortgage. The elderly and those on fixed, short-term incomes should be a low priority to obtain these loans.

The failure of the interest-only mortgages also runs the risk of ruining the national economy. Foreclosed homes will flood the market, pushing prices down, thus bursting the housing boom. Plus, a lot of these mortgages are coming from mutual and pension funds. The more mortgage loans fail, the more shaky investments in these funds become. A lot of people have invested in these funds, living off the interest. If mortgage bad debts continue to rise a lot of people could lose their investments creating a real financial crisis.

A more responsible approach by all concerned will go a long way to alleviate the negatives attached to interest-only loans.

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