Types of Mortgages That You Should Avoid Because of the Risks Involved
There are different types of mortgages and each of them have their own risks. However, there are mortgages that have higher risks than the others and this is what we’ll go through in this post. It’s important that you know your options and their risks so you could determine which one is the best for you. There’s no mortgage type that’s best for everyone as every person has his own needs, budget and situation. You may want to weigh the pros and cons of these high risk mortgages so you could see if they are something that would or wouldn’t work for you.
Low Down Payment Mortgages
It may seem like a low down payment is an attractive deal since you would only be spending a small amount of cash out of the pocket. These mortgages typically allow the borrower to put out about 3.5% down payment for the total amount of the house being sold. However, the lower the money that you pay for the down payment, the bigger your loan amount would be. This could mean bigger amount to pay for the monthly payment or longer payment period. Interest rates are also usually higher with this mortgage type. This may be an option for those who really want to purchase their own house immediately but don’t have enough cash. Then again, the risks are high as discussed.
Interest Only Mortgages
In this type of mortgage, you would only be paying for the interest for the first few years, depending on the lender. This is usually around five to ten years. The payment wouldn’t be too heavy during these years, but the risks take place once these interest only payment years are over. You would be paying not just for the interest but the principal amount. Since you have fewer years to pay for the principal amount, the monthly payment could be higher than usual. It could be challenging if you’re not sure if you’ll be able to afford for it when the time comes.
40-Year Fixed Rate Mortgages
This may not be as risky as the others, but this too has its own drawback. Let’s first go through its positive sides. One of them is that since it’s a fixed rate, you would immediately know how much you would be paying for the entire duration of the loan. Since the period is longer, the amount would also be lower. However, this also means that you would be paying higher amount on the interest.
Adjustable Rate Mortgages or ARMs
For this one, the interest rate is usually fixed for a certain period, typically from six months to ten years. Once this is over, the interest rate would be adjusted depending on the standard interest rate in the market. If the interest rate is lower, then it’s an advantage on your part. However, there’s also a possibility that the interest rate would go up.
Interest Only Adjustable Rate Mortgages
This is a combination of the interest only mortgage and ARM. You would also be paying only the interest of the loan for the first few years. However, instead of a fixed interest rate, it would vary depending on the current rate in the market.
Make sure that you understand your mortgage options to determine which is the best one for you.
Photo Attribution:
Featured and 1st image courtesy of Hywards at FreeDigitalPhotos.net
2nd image courtesy of Stuart Miles at FreeDigitalPhotos.net
