Depending on credit history and budget, potential home buyers typically have several different mortgage options available when shopping for a new home. However, there are a number of high risk mortgages on the market that you should avoid. Many of these risky mortgages usually seem attractive on the front end,but it is vital to do your research and look closely at the fine print. Consult with a real estate professional to discuss all of your options to find a mortgage that fits your needs but also does not put you at risk for loosing your new home. Below are a few types of loans that you should stay away from.
Interest-Only Loans
This type of loan is one of the most riskiest types of loans out there. This type of mortgage is of course very attractive because the homeowner is presented with a very low monthly payment. What many homeowners don't think about is that since you will only be paying the interest on the mortgage, the principal payment does not go down. While it is nice to have a lower payment, you will be blindsided at the end of the mortgage term. At the end of the loan term, you will be required to pay for the entire loan amount. So if you don't anticipate on having the entire purchase price available, you could loose your home. Another aspect that many homeowners don't realize, is that with this type of a loan you will not accrue any home equity. Building equity is one of the main reasons to buy a house in the first place.
Adjustable Rate Mortgages
With this type of mortgage, your monthly payment is not a set amount. Because your interest rate is tied to a certain index such as the prime rate that is currently in the industry it will fluctuate with the market. Most people who choose this type of loan do so because initially you will have a lower payment. For a certain period of time, you will have a fixed rate on the mortgage. For example, you might have five years of a fixed rate, followed by an adjustable rate period. So for five years, you reap the benefits and then you are at the risk of the market. Many people who opted for this type of a mortgage a few years ago fell into big trouble when the economy took a turn. Many homeowners with this type of a loan found that their mortgage payments almost doubled and many have fell into foreclosure.
40-50 Year Mortgages
With these long term mortgages, homeowners are drawn to them so they can purchase a larger home but there are many disadvantages. First of all, will you outlive this mortgage? These ultra-long-term mortgages don't reduce monthly payments all that much when compared with a traditional 30-year fixed-rate loan. They do however, increase the amount of interest you pay over time and dramatically slow down the rate at which you build equity.