Risky Mortgage Types to Avoid
Caution should be taken when borrowing money to buy a home as mortgage comes in different types, each carrying their respective sets of risks. These risks are based on how financial advice on the matter would tell you that they may not be matched by your ability to repay it. One of the leading website from industry snurl.com says that the products should match with the right borrowers. While some lenders might tell borrowers that there is always a chance to refinance, this only applies when home prices increase over time.
Right now, home values have declined after the 2008 financial crisis. The statistics in the Mortgage Bankers Association’s National Delinquency Survey would show that the kind of loans with the greatest likelihood for foreclosure would be subprime adjustable rate mortgages (ARM) at 3.39%. As ARMS have fluctuating interest rates, they make for risky products to borrowers facing some financial difficulties. VA loans also have a lower percentage at 0.70%, followed by prime fixed loans at 0.71%, prime ARMs at 1.96%, and subprime fixed loans at 2.3%. This indicates how subprime borrowers may not be suited to any kind of mortgage product.
Some types of fixed-rate mortgages are a risk to have. Here are some risky types of mortgages to look out for.
40-Year Fixed Rate Mortgages
Fixed-rate types may not easily encounter foreclosure but some, such as a 40-year fixed rate type, is risky due to the accumulated interest over time. The longer one borrows money, the more interest to be paid. One example to consider is if you buy a house worth $200,000 with a 10% down payment ($20,000). Therefore, you would need to borrow $180,000. At a monthly interest rate of 5%, one would be spending a significant amount of money over time, almost to the point that many may not be able to accommodate other expenses.
Adjustable Rate Mortgages
As mentioned before, adjustable-rate mortgages (ARMs) have a fixed interest rate that is often lower during its short initial term between six months to ten years. Afterwards, the rate will adjust and change annually, once every six months or even once a month. This runs a huge interest rate risk because of how its fixed rate lasts for a shorter time than the period of the loan. Interest rate risk happens when the increasing interest rates might make one’s monthly due rise higher. Sometimes, this can be difficult for the homeowner to pay up because of how unpredictable the rest of the period for the loan will be.
The unpredictability will worsen for those with uncertainty over whether their incomes will be enough to make up for the accumulated expenses over time. This is why some financial advice from people is to stay on their mortgages for a shorter period in which they are capable of paying. However, the interest rate might decrease, but the sense of unpredictability might not appeal to most borrowers.
Low Down Payment Loans
Low down payments seem to be low risk. This is also due to their lower foreclosure rates. However, the problem with this form of loan is that when the prices of homes drop down, they might not be easy to sell or refinance. Some of those who make low down payments tend to not have enough in the bank.
Find the right product that fits your needs and circumstances. Do not go for anything that is beyond your income or ability to pay back monthly. Take the time needed to decide to pursue what kind of mortgage loan you can avail.