A new way to lose your shirt on real estate...

I've complained in the past about intest only mortgages. I know there are certain, very limited situations (like people who don't have steady income but instead get much of their income in the form of commissions) but of late they are being used by people who can't otherwise afford houses. This stinks for people like me who want to buy houses, but are unwilling to use risky financial instruments to do so - because it's driving up demand for houses, and thus driving up prices.

The amount of alternative loans makes me think that the housing market will eventually collapse - the stat from my earlier post was something like 25% of mortgages in Maryland are interest-only.

But if the interest-only mortgage wasn't risky enough, I just found out there is a new, even riskier mortgage out there - option ARM (adjustable rate mortgage). With an option ARM, you can pay less than the minimum payment each month. This means with interest accumulating, your payments and balance actually go up, instead of going down like a normal mortgage.

People who buy expensive new cars with little down often find out that depriciation causes them to be "upside down" in the loan for a while, where they owe more than the car is worth if they sold it. This isn't a big deal if you are keeping the car for a while, because eventually your payments will go down faster than depriciation. But if you want to sell the car, you are screwed.

Now you can have the same fun with your house. If housing doesn't appriciate -or even worse, if the bubble bursts- and you keep making less-than-minimum payments on your adjustable option ARM, you get to owe more on your house than it's worth.

With financial instruments like this coming up, people like me who are reluctant to use "alternative" mortgages (ie people with some financial common sense) are getting driven from the housing market by people who are using these very risky instruments.