Understanding the Risks of New Age Mortgages

It has become difficult in these times for many people to even think about owning a home. This economy and the damages it has brought about has scared a number of people away from home ownership. However, to combat this fear, many banks and lenders have produced new age mortgages that are far more tempting for consumers, but come with a number of hidden drawbacks that people are unaware of. Many people are able to qualify for these new mortgages, but at the beginning, the pitfalls are often unseen.

The economic downturn left many people unable to purchase a home that is in their price range. Banks have seen this, and they came up with options for people looking for a home that are downright risky for many people to have. This has led many people to take out mortgages that have high risk and low initial payments. Many people haven’t realized that this can put their new home in jeopardy along with their financial well being. We are going to look at these new age mortgages and when they could be right for you. Let’s discuss some of the examples of new age mortgages that you might be tempted into taking.

Types of Mortgages

One of the first examples of mortgages banks have come up with is the piggy back mortgage. This is one of the least risky options. What is entailed here is taking out two different mortgages. The first will be a line of equity of the home up to twenty percent of the value. This becomes the amount you use to make your down payment. You then take a second mortgage to cover the rest of the home. The risk involved with this is that you have zero equity in the home. This becomes very critical when the house depreciates in value.

In terms of the most dangerous mortgages that have come out, we have to discuss option-payment mortgages. What is entailed here is that you have options of payments each month. These options include principle and interest, interest only, or a minimum payment required by the bank. The minimum payment can be lower than your interest each month. The risk involved with this is that anything you don’t pay gets put on top of the mortgage. If you get too far behind with payments, you can be turned upside down financially rather quickly and get yourself in a lot of trouble.

Another risky option is an interest only mortgage. This process goes on by paying only the interest each month for three to ten years. When that time is up, your payments will jump so you can start paying the principal. When this happens, you need to be ready for that jump in payment each month. People oftentimes get into these payments when they are looking to resell the house, but if you are unprepared for the quick increase in monthly payments, then you could easily miss a payment or two and fall into an uncomfortable financial situation.

The safest mortgage one can take out is a 40 year fixed mortgage. This gives you ten extra years over a 30 year mortgage and essentially gives yourself lower payments. The risk involved is that you are going to take much longer to build equity in the home.

One more option that is very hard to find anymore are low-doc mortgages. This is when a lender will allow you to take a loan without needing to provide a proof of income. This can be very risky because many people get into loans that they cannot afford. You should only look at this if you are sure you can make your payment each month and are not intrigued by any of the normal mortgages that are offered.

Choosing a Mortgage

So how do you make sure that you are protected from the bank when searching out the mortgage that fits your life and budget? If you are a high risk home buyer, oftentimes banks will only require you to look at some of the riskier options. The first thing to do when protecting yourself is to make sure that you get a fixed rate mortgage. Rates at the time are low and you will be protected from increases in rates.

If an adjustable rate mortgage is what you qualify for, make sure not to walk into the situation blindly. Look at what can happen when the rate increases, as you need to make sure that you will be able to make the payment if the interest rate goes up.

When searching for the right loan, do not be afraid to shop around. You are not only limited to your bank or banks in your area. Often times you can find a better rate from a lender online. In all, just make sure you don’t get yourself a loan that is larger than you can afford. Waiting another year to save up enough money might be the most beneficial thing in the long run, rather than jumping into a situation that you are not prepared for financially.