One of the girls at work just bought a new house for $350,000. I thought at first: WOW!. Now I'm hearing the story. The house is brand new because she didn't want someone's garbage. She got $10,000 for buying (pretty good incentive I say) and she used it towards closing costs (excellent move). Now I hear she got an interest only loan (huh?). Apparently she only put the $10,000 towards closing costs (nothing else). She came to talk to me today because her husband goes off work next week and he doesn't start back again until January. In other words, unemployment starts and income stops. She says she has about $10,000 in savings (hmmmm....sounds like a familiar figure). Well anyway, in 5 years she starts paying principal on a loan that will now be for a 25 year term. I didn't do the figures, but I would guess it would be quite a bit of a mortgage. She said her plans are to refinance in 5 years back to a 30 year loan. She hopes her home value will increase enough that she'll be able to do this. (At this point my mind is reeling. I know that that is everyone's hope that their home values will increase substantially - but - HELLO - I lived through the 80's and the recession. Realistically you hope that your home increases, but you pray that it doesn't go down in value and that it maintains value.)

I am horrified. This girl and her husband got a 30 year mortgage that they obviously can't afford because they only would give them an interest only loan. In 5 years they have to refinace in order to make the payment. Well what if the house doesn't increase in value, one of them gets hurt or sick and/or they have money problems. What could happen is they would have to sell their house. Worse case would be they would have to sell it for a loss.

Well I kind of looked into interest only loans. Did you know that interest only loans were very popular before the Great Depression? When the banks began to go belly up, they called in those loans (can't do that now of course), but hundreds of people lost their homes. It took us 40 years to climb out of that big mistake. Now I understand that they are also offering 40 year loans.

I don't know. I guess I have never wanted something so bad that I thought losing everything I had was worth the risk. Do you know what I mean?