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Mortgage Refinancing: Risky Adjustable Rate Loans

The number of homeowners relying on risky mortgage loans to finance their homes is rising despite warnings from consumer groups and the government about the risks involved with these new mortgage loans.

Mortgage lenders are now offering a variety of mortgage loans ranging from interest-only to option mortgages. These mortgages are designed to offer the greatest amount of payment flexibility for the borrower; however, that flexibility comes at an extremely high price. The driving force behind the popularity of these risky mortgage loans is the rising cost of housing in the United States. The rising cost of houses has made it difficult for many homebuyers to purchase homes with traditional mortgage financing.

These risky adjustable rate mortgages allow potential homebuyers to qualify for much higher amounts than they would be able to otherwise. This is often abused by many homebuyers that purchase more home than can actually afford. In some markets, California for example, these high risk adjustable rate mortgages are the only loans homebuyers can qualify for. Many of these homeowners do not understand the risks associated with the mortgages they are taking out and will inevitably lose their homes to foreclosure.

The problem with these loans is that they are not interest only or option based forever. The interest only or option period where the homeowner has lower monthly payments is usually over after five years. At the end of this period the loan is converted to a standard mortgage with an adjustable interest rate. When this conversion happens, the lender will add the loan principle back into the monthly payment and raise the interest rate. This results in a significantly higher monthly payment than the homeowner is used to seeing. If the homeowner’s budget will not support the new payment amount and they are unable to refinance the mortgage or sell, the homeowner will lose their home.

To learn more about your financing options and how to minimize your risk, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

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