Home Mortgage Weblog

Seductive loans in the market offer options like ‘interest only payment’ or ‘adjustable-rate mortgages’. Both these category of loans can lead to future shocks for the customers.

For example, in the case of an interest only loan, the borrower pays only interest and no principal for a number of years. While, this decreases his initial payouts, eventually this can mean a huge jump in monthly payouts, when he starts to pay the principal.

In the case of another type of seductive loan, the minimum payment option is structured to be lower than the interest that accrues. Borrowers, who use this option for long periods will find that their outstanding loans start exceeding the value of their home. This is referred to as negative amortization.

In the present realty market, where interest rates have shot up, seductive loans will turn out to be the worst loans as outstanding amounts will rise significantly.

Federal regulators are now seeking to issue Guidance to financial institutions to acquaint customers thoroughly about the flip side of such loans.

Experts say the trend is fallout from the housing boom of the past decade, in which people took out high-risk house mortgages, such as interest-only and no-down-payment loans, in order to get into expensive homes. A firm ForeclosuresMass which tracks foreclosure filings in land court says Essex County had a 49 percent increases over the same period in 2004. Suffolk, Plymouth, Bristol, and Barnstable counties all had increases of more than 42 percent. Home prices in Massachusetts have appreciated 67 percent in the past five years. October's median selling price for a single-family home was 349-thousand dollars. Thus as a whole homeprices are at its high.