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This is an old statistic, but it’s one that I have only just encountered. I just read on California Mortgage News that 61 percent of all home loans issued in California last year were interest-only mortgages.
As I’ve written a number of times, there’s lots of reasons for being worried about all those interest-only loans.
The basic concern is that these loans have introductory rates that are very low, but that those rates increase significantly after the introductory period. When those rates bump up, property owners who have bought more house than they can afford could be in trouble. If their home hasn’t risen in value, they may be forced to sell their property and could even find themselves owing money to the bank if they can’t get their asking price.
The other concern is that, due to the high proportion of these loans taken out, a large number of people could find themselves in the same situation at the same time. We recently reported that something like 50 percent of the mortgage debt in San Diego will be subject to mortgage rate re-sets in the next four years.
That means lots of people seeing their payments rise substantially, and could mean lots of people walking away from their mortgages, which would in turn push prices down even more.
What the 61 percent statistic shows is that the problem’s not just in San Diego. A
majority of new homeowners in California are currently not paying off any of the debt they have taken on. They are merely paying off the interest on that debt – a situation some experts say is akin to renting their properties from lenders. Whether all those people can justify making much larger monthly payments when their mortgages kick up could potentially define the future of California’s real estate market. Some analysts argue that it could define the Golden State’s entire economic well-being.