Every month, I look at my Amex statement and boggle at the ‘minimum payment’. With such leverage, someone could buy a house, fill it with furniture, park a Mercedes in the driveway, and take off for a few weeks’ vacation on the shores of Lake Como. Would it be a good idea? Only if you’re terminally ill and want to have fun.
Current trends in home loans seem just as foolish. People are encouraged to pay only the interest, nay, even less than that, while being assured that since the value of their property can only go up, it will be no problem for them to refinance or sell. Yet even with such generous payment plans, people are still stretched to the limits. If you doubt, look at the impact of gas prices. Someone who can’t afford a few hundred extra dollars a month to fill their vehicle is unlikely to be able to afford the few thousand extra dollars it would take to actually pay their mortgage once their loans reset.