What Are The Riskiest Types Of Mortgages Loans Available?
ora of loan programs expanding every year,
borrowers are finding themselves faced with decisions about
what loan type is best for their individual situation. The
potential for difficulties and confusion is significant, and it
is for this reason that borrowers seek to educate themselves
about the various types of mortgages and their features before
committing to any contract.
If a borrower is seeking stability and consistency, the safest
type of loan contract is the traditional 30-year fixed
mortgage. With this loan, the borrower’s payment and interest
rate does not change for the entire duration of the loan. The
payment will be predictable and the borrower does not need to
concern himself with potential changes in the real estate
marketplace or the economy.
However, the 30-year fixed mortgage may not be attractive to
the more sophisticated buyer, or to the buyer with less
disposable income. These individuals often choose ARM’s,
Interest Only loans, or Balloon loans. All three of these loans
have their own unique set of characteristics that make them
attractive, but each of these loan types carry the potential
for confusion and significantly higher monthly payments in the
future.
Any time a borrower gets a mortgage with a fluctuating payment
schedule, there is the potential for problems in the future,
which could ultimately result in damage to credit profiles or
even foreclosure. The safest type of loan is one that the
borrower can afford every month, and one with a guaranteed
fixed payment. The alternative loan types mentioned above all
have payments that will undoubtedly increase at some point in
the future, thereby presenting risk to the home owner’s
financial situation if he fails to adequately prepare for those
changes.
When borrowers get ARM’s or Balloons or Interest Only loans
knowing that they can barely afford the initial fixed payments,
they are putting themselves in serious danger. Lenders and
mortgage brokers often fail to adequately prepare the borrower
for the increases in payments looming on the horizon.
Realistically, borrowers should only apply for and obtain such
contracts when they can legitimately afford the highest
permissible payment in the contract, rather than just the
initial reduced payment.
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