In today’s competitive marketplace mortgages are easy to come by. Some people are even cashing out the equity in their homes for everything from a cruise ship vacation to a new BMW; this is of course, not a good idea.
There are many unscrupulous mortgage brokers and even lenders that push risky loans on homeowners that are unaware or do not understand the risks. They sign up for these mortgages because the introductory periods come with extremely low monthly payments. The bad news is when the introductory periods end, the payments skyrocket.
Mortgage foreclosure rates in the United States have not yet been affected by this trend because these loans are still fairly new. Home values have continued to spiral upward and interest rates are still at historically low levels. The government has issued warnings to lenders and consumer groups about the coming problems with these risky home loans.
Below is a list of dangerous mortgages loans on the market and why you should avoid them.
When you make interest only payments for 3 to 5 years your monthly mortgage payment can go up by as much as 25% when the principal becomes due. On top of that most interest only loans have adjustable interest rates that are recalculated with the current rate at the end of the interest only period. This can be a double blow to a homeowner that is having trouble stretching their dollars to make the interest only payments. Rising interest rates alone could raise your monthly payments by as much as $1,000! At this point it may be nearly impossible to refinance or sell the property if you get into trouble with the payments. Because you are not building equity in your home, you could end up owing your lender more than the home is worth if the housing market declines.
Option Adjustable Rate Mortgages (ARMs)
This type of ARM allows you to make paying interest “optional.” When you don’t make interest payments on the loan this amount is added on to the principal loan balance and begins compounding interest. This means that the amount you owe on your home could balloon to over 115% of the original balance over time. Eventually your lender is going to want this loan paid back and your mortgage payments may not be affordable.
Piggyback Loans
Piggy back mortgages are used if a homeowner doesn?t have 20% for a down payment when purchasing the home. The homeowner usually has to come up with 10% and the remaining 10% is “piggybacked” on the mortgage. Many homeowners do this so they will not have to purchase Private Mortgage Insurance (PMI). The problem is this debt could make your mortgage unmanageable down the road if your financial picture changes. This loans are made even more dangerous by lenders that offer them with interest only payments.
To be safe in today’s economy it is best to stick to a traditional, fixed interest rate, 15 or 30 year mortgage.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
