Interest only loan simply postpones day of reckoning

18 Nov Interest only loan simply postpones day of reckoning

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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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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