I have to admit that I was fairly naive when it come to money until I really started looking into it. There are a lot of things that aren't general knowledge (because banks and credit cards would miss out on some money) and there are some things that I have just never come across. Writing this blog has shown me some truly disastrous things out there and this one needs to be somewhere near the top of the list.
I thought that EBP loans were bad but I have come across something worse. What's an EBP loan? The reason you probably haven't heard of it is because I made it up. You have probaby heard it called an "interest only" loan, which is such a misnomer that it should be illegal under false advertising laws. You don't pay only interest as the name would have you think. People with these loans are paying interest, insurance, taxes, and usually PMI. The only thing they aren't paying is anything toward the principle of the loan. They aren't reducing the balance at all. They are renting their own house. So I call them what they should be called, "Everything But Principle (EBP)" Loans.
These loans are usually a bad idea but they pale in comparison to reverse amortization.
I'm going to explain in case there are people out there like me who didn't know about this way of committing financial suicide.
In the reverse amortization loan, you don't even pay all of the interest that's due. If you are supposed to be paying $1,000 a month in interest, you pay $600 instead. If they make commercials for this crap, they probably tell you that you are saving $400 a month. You aren't saving that $400, it goes onto the principle. They add it to your loan every month. If you are buying a house for $250,000, you will owe $254,800 after a year. It's the opposite of buying a house. I can't even fathom getting into something like this.
This loan was probably created for house flipping. You get the loan and then you hope that the value of the house goes up faster than the interest that's building up.
If it doesn't, you're upside down on a house.
When the loan resets, you now have to pay more money than before for something you had no intention of keeping in the first place and might not be able to afford.
It's not bad in just that way but people who are getting this type of loan are doing it so that they can afford the payment in the first place. When the loan resets and you have to start making total interest and principle payments, coming up with $500-$600 a month might be more of stretch than they are capable of making.
For some people, the only way out of these loans is to let them go into foreclosure.
What a scary arrangement.