There are a variety of high risk mortgages on the market today. Many homeowners today sign up for these mortgages without fully understanding the risks involved. Here are the riskiest mortgages available and why should avoid them.
Option Mortgages
This is the most dangerous mortgage on the market. This mortgage comes with four payment options and an adjustable interest rate. The first repayment option has payments amortized for 30 year repayment. The second repayment option is amortized for 15 year repayment. The third repayment option is based on interest-only payments. The fourth option is the “minimum payment” option. This minimum payment does not cover all of the interest due each month on the mortgage. The interest that is not paid is added on to the principal loan balance. This growing principal balance is a phenomenon called “negative amortization.” This means not only will you never pay off the loan; your balance grows each month.
Interest only mortgages are another type of risky mortgage. The monthly payment amount on an interest only mortgage is only enough to cover the interest due for that month. This loan does not repay any of the principal balance due on the mortgage. These loans are interest only for a specified period of time; at the end of this time the principal balance will be due. This loan could require a balloon payment at the end of the interest only period. If the homeowner is unable to refinance and pay off the balloon payment they could lose their home in foreclosure.
Piggy Back Loans
Piggy back mortgages allow individuals that do not have enough cash to pay the down payment on their mortgages. This “piggy back” is a second mortgage that allows the homeowner to finance their down payment. The advantage of a piggy back loan is that you will qualify for the loan without paying for Private Mortgage Insurance; Private Mortgage Insurance can add hundreds of dollars to your monthly payment amount.
The problem with this piggy back loan is that it is secured by your home. If you fall behind on the payments you risk losing your home regardless of the status of your primary 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.
