Thursday, May 26, 2005
The things I don't know
I had no idea that you could get a mortgage on a house and only pay the interest and not the principal.
Thomas Sowell explains:
How can people afford to live where housing is so expensive? One of the ways of coping with high housing costs is with "creative"--and risky--financing. Roughly two-thirds of the home mortgages in the San Francisco Bay area are interest-only mortgages. Theoretically, you could make mortgage payments forever without acquiring a cent of equity in your home. You would essentially be renting with an option to buy, should your income ever reach the level where you could afford to pay something extra toward the principal.
In reality, the interest-only mortgage payments apply for only a limited number of years--three to five years in most cases--after which the payments rise, so as to contribute something toward the payment of the principal. People who expect their incomes to rise significantly in a few years assume that they will be able to handle the higher payments then. Of course that assumption can turn out to be wrong and the house can be lost.
As recently as 2002, only 11% of the new mortgages in this area were interest-only mortgages. But today 66% of new mortgages in the area are financed that way.
So that's how people manage to live in the Bay Area. Amazing.
posted by Mark Butterworth |