3 Types of High Risk Mortgages Homeowners should avoid

There are several high risk mortgages on the market that you should avoid at all. A high risk mortgage puts in front of you those opportunities that may looks attractive on the front end. However, when you analyze them closely, then you would find them not quite as good as it looks. Suddenly you would find yourself in a very high risk situation.

high risk mortgage

Therefore, in order to avoid such situation you should do everything that you can to avoid a high risk mortgage. Here I have mentioned few types of high risk mortgages that you should avoid.

Type # 1: Interest-Only Loans

The interest-only loan is one of the riskiest types of loans out there. With this type of arrangement, you will usually be lured by the more affordable mortgage payment each month. The payment will be lower each and every month for the life of the loan, since you will only be paying the interest on the mortgage.

While it seems to be nice to have a lower payment, at the end of the mortgage term you will be blindsided. At that time you will then be responsible for the entire loan amount. Therefore, if you got a $200,000 mortgage, then for 30 years you could pay the mortgage faithfully and then at the end of the loan you have to come up with $200,000 all at once. If you don’t pay the full amount then the house belongs to the bank.

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Type # 2: Adjustable Rate Mortgages

An adjustable rate mortgage is another type of high-risk mortgage. In adjustable rate mortgage, at some point you do not have a fixed monthly payment. In this type of mortgage your interest rate is tied to a certain index such as the prime rate that is currently in the industry.

The reason that many people choose to go with an adjustable rate mortgage is that at initial point you will have a lower payment. You will have a fixed rate on the mortgage for a certain period of time. For instance, you might have five years of a fixed rate, followed by an adjustable rate period. So for about five years, you reap the benefits and then you have to face the market risk.

Many people who have chosen adjustable rate mortgages over the years have found that their payments have doubled as the time passes. Most people are unable to afford their mortgages if they were significantly higher than what they are at present.

Type # 3: 50 Year Mortgages

This type of loan is identical to the interest-only loan in a way that you build equity so slowly. It is a little bit better than interest-only but not much. Many people get this type of mortgage so that they can have a bigger house. It results in overextending them and their budgets.

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