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Some home loans are riskier than others

The current high prices of real estate have left many Americans grasping for any way they can find to purchase a home. We all need a place to live, but if you are unfortunate enough to be hunting for a home in California, New England or parts of Florida, you may find yourself wishing you lived elsewhere. The prices have gotten so out of hand that it is almost impossible for an average wage earner to buy a home with a traditional 30 year, fixed rate loan. Instead, buyers are having to choose from an often bewildering array of risky loans that may leave them unable to make payments just a few years down the road. The situation could get even worse if home prices fall, as many experts predict they soon will.

Many of these types of mortgages go by different names and have confusing terms. Almost all of them have variable interest rates that are likely to go up as rates have been hovering near historic lows for quite some time.

Here is an overview of some of the current mortgage types and their pros and cons:

  • The interest only mortgage
    - The Interest Only mortgage is set up in such a way that the borrower pays only interest for the first few years of the loan’s repayment schedule. The amount of time for the interest-only payments varies by lender, but it can run anywhere from three to ten years, with five being typical. After the predetermined period of time, loan principal is added to the payments, and amortized over the remaining life of the loan. The good: Payments are quite low for the first few years, as the payment does not include any principal. The bad: The principal, when added to the payments, is applied over a fewer number of years, so the increase in the payments will be huge once the interest-only period ends. Buyers could see a jump in their payments of as much as 50%
  • 40 Year Mortgage- Like the 30 year loan, but ten years longer. The good: Lower payments at a fixed rate. The bad: You will pay a lot more interest over the life of the loan, and the payments aren’t all that much lower than for a 30 year loan. This one beats an Option ARM, though.
  • The Option Arm - The Option ARM, quite simply, is the World’s Most Dangerous Mortgage. The loan is a variable rate loan with a “teaser” rate that applies to the first month. That rate can be as low as 1%. That sounds good, but future payments are based on that rate. The borrower has choices of the “minimum” payment, interest only, a 15 year payment, or a 30 year payment. The good: Initial payments, especially the “minimum”, which is based on the “teaser” rate, are quite low. The bad: That minimum payment doesn’t even cover the interest accrued during that month. If you pay only the minimum, your debt actually increases. Sooner or later, you will have to pay some amount that covers the principal, and your lender can make that choice without your consent if your debt increases too much. Payments could double, and if your home depreciates, you could be left with a loan that’s worth a lot more than your house.

Best advice? Buy only as much home as you can afford, and wait for the prices to come down.

Or you can find out more about option only mortgagemastersonline.com by reading more articles.
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