These Four Mortgage Types Are Traps – Under the Right Conditions!
When you one day decide it is time to own your own home, it is usually with the help of a mortgage that your dreams come true. Few people have a large sum of money it takes to pay off a home in cash in one purchase. But even with so many people having mortgages, borrowing of money should be treated with a lot of caution. This is more so in the case of borrowing a large sum.
There are actually several different options available when it comes to taking up a mortgage, as there are many different types. Understanding the differences can help you make a better decision. Here we explore some types of mortgages. But particularly four of the riskiest types, and describe to you what makes these types of mortgages so risky.
40-Year Fixed-Rate Mortgages
When it comes to fixed-rate mortgages, the fact that the interest rate is not changing may seem attractive. The low rate of foreclosure may lead you to think it’s a good idea, too. However, the 40-year mortgage works the way it does. But only because you are actually paying more interest as you borrow funds for a long period.
Doing the math will show you just how quickly interest adds up. So, when you borrow money over ten, fifteen, twenty, or forty years, your interest adds up. Your eyes just may burn when you see how much you’ll really be paying for your home! Having a mortgage over four decades reduces the funds you will have for your retirement too. So do the math on how much you will be paying if your mortgage is for a longer period. Compare this against how much less you will be paying every month before you must sign the paperwork!
These financial products are mortgages that are designed to have a fixed interest rate for a window of time initially, which may be six to ten years of the mortgage lifetime. This is usually referred to as a teaser interest rate, as it is an attractively lower interest rate than that of a fifteen or thirty-year mortgage fixed loan. However, after this initial period, the interest rate periodically adjusts. It can be annual, bi-annual, or even once a month. This means you are at risk of your monthly payment becoming more expensive and it could even climb to a figure that the borrower can’t even afford. This unpredictability makes the ARM a very volatile loan product, especially risky if you are dealing with a high principal amount!
An interest-only mortgage product is one where the borrower pays the interest on the loan for an initial period, maybe for five or ten years, which allows for a lower monthly payment initially. This lower monthly installment makes this loan type attractive to real-estate investors who plan to own properties for a short time before flipping them, as they reduce carrying costs. It is also good for people who have irregular cash flow or income or if you happen to have an increase in your income or cash flow in the future.
However, the risk in this loan is the fact that the interest rate is higher than with a conventional type of fixed-rate loan. It is particularly because people tend to default on his loan type more than with the conventional type. This product can be beneficial, or it could mean trouble. Especially when the monthly payments increase after the interest-only period!
In his type of mortgage loan, the interest rate is not a fixed rate and actually fluctuates with the market. This basically means you have the risks of an ARM product along with an interest-only product all bundled up together! Most people do not fare well with the uncertainty involved in this type of mortgage. That’s because the payments are changing so much every year!
The world of finances is rather volatile. That’s something we all learned with the meltdown that took over the globe in 2008 and in 1987. So if you are trying to foot in your finances and also buy a home at the same time, it is important to be cautious. You can start by gathering as much information as possible before every decision. Mortgage experts will say a risky mortgage is one that is unsuitable for a borrower’s repayment ability. But it can be more than that, as you have learned from these mortgage types. There are many ways a mortgage may be unsuitable for you. So do your research well to avoid landing up with a financial product that just ist right for you!
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