For those that don't know these terms, here's a quick primer.
(apologies of I'm off on this. I'm still learning but this is what I've pieced together in my research)
Variable interest rate loans - these loans start with a very low interest rate which makes for far smaller mortgage payments for the first few years. After a set term, usually multiples of five years, the rate increases and you pay more money for the remainder of the loan life. TH jumps are usually 2 two three percentage points which may not sound like much but when you think about the cost of a home, the amount is pretty large - especially over time.
On its own and with a longer loan term this could be less a problem that it seems to be. In fact, it's a good way to break into the market if you plan for it. They do work best when I market slows, with overall property value lessening because less worth means less money upon which the value theoretically exists. Plus in a cooling market, rates will drop organically as demand slackens which means you pay less on your variable loan.
Now, when the market is booming as it has been for the last decade.. ouch. Those few points can mean thousands of dollars more you have to pay when the adjustment happens.
Interest Only loans - you pay only the interest for the first 5 to ten years. This means you take the principal, calculate the interest you'd pay over the term and pay that off over a few years. After the term you have to pay the principal as one lump sum or refinance it over a longer span, which usually happens, but the catch is that you continue to pay interest but ALSO pay on the principal for the remainder of the loan.
Loans of these sort are very good for wealthy individuals or people that have a variable but steady income. The ideal way to use this loan is to take the money you're saving by not paying on the principal and invest it. When it comes time to pay the principal you take the money you've been investing for the last 5 to ten years and gouge a huge hole in the principal, if not pay in full. That's how you win interest only game.
If you're taking that extra money you save to, say, feed your kids you're going to screwed. Painfully. In an uncomfortable spot (the back of Volkswagen). Normally, in hard times, you could refinance the house with what equity you have earned bu paying both interest and principal. With these types of loan, you don't do that so you get to be the bank's bitch when you try to save yourself. You lose that safety by being po' and getting a loan of this type.
So, put these two together and you have a time bomb of pain especially when the national interest rates continue to rise and markets that get more expensive - say the last three years of the housing market (especially around Madison).
I was listening to NPR and a financial analyst introduced the term "affordability challenged." These are people that can't actually pay the future rates but still get the variable interest only loans. It means, essentially, lower class people or "workers" as she put it that won't have the necessary investments or salary increases to account for the increased mortgage payments. I laughed at the ridiculously "nice" term for poor-ass people. It's true, ultimately, that they cannot afford these houses... but they're still buying them. And you know, a market bust would be good for some of these people..barring the inevitable recession and wage decreases that would follow...
I hate to say that it's because of all those people, as well as the day traders that bust or the rich that spend all their money on their hummer, that I'm likely going to be able to get a house in a few years. The market will soften, if not bust completely, when the next few years sees the variable rates spinning. It sucks but, come on people, when did we become so myopic?
You know how people are dealing with these changes? They're getting 50 year mortgages. 50 years. 50! Most of the people that get these loans won't live that long. What then? Pass the debt to your children? Screw that; if that's what happens, the current generation of people are incredibly short sighted and selfish for it. That could ruin their lives depending what the world looks like in 50 years.
Ludicrous. Just ludicrous.