Risky Mortgage Rundown
Risky Mortgages You’d Better Avoid
Today, with a mortgage or refinance being so hard to obtain due to the housing bubble that resulted in a global financial crisis, we are subject to higher risk of signing up to a risky mortgage like those that already have lead countless homes into foreclosure. Here are the riskiest mortgages for you to look out and stay away from.
•Subprime mortgage, the top risky one, that shattered U.S. housing economy in the late 2000s. This mortgage works pretty much like payday loans: the risks of unreliable borrowers are compensated with high interest rates, penalties and caveats. On top of this the greater part of subprime mortgages are adjustable-rate ones. When borrowers agree to let their interest rate “adjust” over time in exchange for the initial low-interest payment, after a while they have to face doubled mortgage payments, which make repayment almost impossible.
•Option ARM loan, a variety of adjustable-rate mortgage, offers borrowers a choice between a rock and a hard place: they can either opt for a minimum, an interest-only payment, or 15-30- year fully amortizing payments. What borrowers have is a situation, where either interest is deferred through minimum payment and is added back on top of the loan and reapplied, or their monthly payment shoots up. What this means is that a home starts costing more than it’s worth.
•Piggyback loan is a home-equity line of credit (HELOC) worth 20% of the home’s values. The borrower uses this cash advance as a down payment, while the rest is to be covered by a primary mortgage. This way the borrower escapes paying private mortgage insurance in case the cash he/she has on hand is almost enough to make a down payment. But since there was no equity at the very beginning, your home can lose value in the falling housing market, and in case of sale you’ll lose your money.
•40-year mortgage, though offering lowered payments, stretches for an extra decade and you will find yourself paying for your home a lot more than its true value is. And if you enter a long-term mortgage without making a down payment to boot, your equity-building period will be delayed.
Safe heaven
A relatively secure mortgage, the 30-year fixed-rate one, doesn’t require any excessive amount of interest to be paid back, and in case of down payment you also avoid paying the PMI. Yet, in post-bubble period banks are making their lending policies tighter, trying to reduce the risks of 30-year fix-rate mortgages.
However, if you wish to avoid the trap of never-ending mortgage with a possibility of ending up with foreclosure, you’d better opt for a fixed-rate mortgage with a short-term repayment schedule, even if it means high monthly payments and refinancing being mostly unavailable. Even this hard, the present situation of real estate market and low rates makes it a smart decision to stick to a fixed-rate short-term repayment plan.
