Three Risky Mortgages To Avoid
In the mortgage business, there are a plethora of home loan instruments available to make your dreams of homeownership a reality. While each type has advantages and disadvantages, some of these loans inherently carry more risk than others. For the majority of homeowners, it is usually best to avoid the following three types of loans:
Adjustable Rate Mortgages
You’ve probably heard warnings about these so-called “ARM” loans already – 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 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 are in your future.
40-Year Fixed Mortgages
Most experts will recommend a fixed-rate mortgage to the masses, as historically they pose the least amount of foreclosure risk to borrowers. However, stretching out the typical 15- or 30-year loan to 40 years means paying 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.
Ensure you’re making the best decision for your financial situation by researching your home loan options and making an educated decision about this long-term financial commitment.
Image via Flickr/browngrass