These Mortgage Loans May Not Be In Your Best Interest

With so many home loan instruments available to prospective buyers, it can be daunting to navigate the advantages and disadvantages of each. While every buyer’s situation is unique, it’s important to know that some types of loans are inherently riskier than others. For the majority of homeowners, it is usually best to avoid the following three types of mortgage loans:

40-Year Fixed Mortgages

One of the more recent additions to the plethora of loan options, the 40-year fixed mortgage stretches out the typical 15- or 30-year loan to 40 years, meaning unwieldy amounts of interest over the life of the loan. Finance gurus at Investopedia recently showed that a 40-year loan will cost a homeowner approximately $107,000 more on a $200,000 home than a conventional loan with shorter terms.

Adjustable Rate Mortgages

Warnings about these so-called “ARM” loans abound – although the initial teaser interest rate may be a fantastic deal, it won’t last. Adjustable Rate Mortgages feature an interest rate that readjusts periodically, sometimes as often as each month. This means your payment will change frequently, many times becoming higher than anticipated. It can be difficult to budget when your largest expenditure each month is a variable amount, so think long and hard before entering into an ARM loan contract.

Interest-Only Mortgages

Interest-only mortgages typically feature terms that require nothing more than interest payments for the first five or ten years of your loan. These loans are attractive because, when you’re only paying the interest on a home loan, monthly payments are lower than with a conventional loan that also calculates a monthly payment on the principal. What this means down the road, however, is that you’ll have a much shorter time to pay off the principal, meaning significantly higher payments in the future.

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