Interest Only Mortgages
While banks try to make it easy for almost anyone to purchase a home, it is important to be a smart consumer and understand the many mortgage products available. In fact, many homeowners who are dead set on purchasing a home, even if it is above their means do so with risky mortgages. Unfortunately, many of these mortgages usually end up foreclosing. If you would like to reduce the risk of foreclosure, here are 3 specific types of mortgages you should be aware of.
Option ARM (adjustable rate mortgage)
While these loans give the homeowner more flexibility in monthly payment options, it many times can cause lots of financial difficulties. An option ARM mortgage works by allowing your interest rates to fluctuate. Interest rates can change drastically. For instance, in the last 30 years, rates were higher than 17% and lower than 5%. Instead of your interest rate staying the same, it changes along with the markets. While a lower interest rate in the future may work in your favor, if the rates rise- even a point or two, this can spell disaster for many homeowners.
Negative Amortization Mortgages
These types of mortgages allow home owners to pay less interest over a specific period of time. For many homeowners this type of mortgage looks like a good idea, this gives them the flexibility from a month to month basis or a yearly basis to choose their mortgage payment. While it looks good in the short run, in many cases the long run can be extremely costly.
One of the big draw backs of negative amortization mortgages is that in many cases at the end of your mortgage term you may have no equity in your home. In the worst case scenario, at the end of the mortgage term if your home has lost value you will still owe money and will have to write one big check. It should be noted that negative amortization mortgages may sometimes be a feature of option ARM mortgages.
Interest Only Mortgages
Another risky mortgage is the interest only mortgage. This mortgage gives a home owner the ability to pay less each month, because they are only paying the interest on the loan and not touching the principle. Obviously this is a bad idea for anyone that would like to build equity in their home. Another reason this mortgage is extremely risky is that if your home loses value, you will have to write a check to the bank after you sell it. It should be noted that many home buyers that choose this type of mortgage are only planning on living in the home for a few years or planning on refinancing their home in a few years. However if your plans change and you decide to stay, you might find that this type of mortgage is extremely costly in the long run.
Before buying a home, make sure you understand all types of mortgage products and choose the ones that work best for your situation.
