Taking lessons from the 1987 market crash and the 2008 financial crisis is the importance of caution when taking mortgages. The type of mortgage you opt for can lead you to being a homeowner or facing foreclosure, or on the verge of bankruptcy before you can finish repaying.¹
To avoid such adverse and very possible situations are by choosing the right mortgage. Some mortgages give you a hard time repaying besides having to repay for almost your entire life. These are called risky loans.
Here Are the Risky Mortgage Types You Should Avoid
1. 40-Year Fixed-Rate Mortgages
A mortgage with a very long term looks favorable to a borrower because the repayments are smaller. These loans may also have lower foreclosure rates, but in the long run, you end up paying a lot more. This happens because the longer you have to repay a loan, the more interest you have to pay over time. That makes this type of loan a bad idea.
Besides, paying a loan for 40 years could end up leaving you with little money in retirement or inability to cater to other family needs like education for your children. A loan that long is also a substantial financial burden to carry for almost your entire adult life.
2. Adjustable-Rate Mortgages (ARMs)
These loans start on a fixed interest rate for some time which could be anything between six months to ten years. This initial rate, commonly called a teaser rate, is relatively lower than the 15 or 30-year fixed-term loan rates. After the term under the teaser rate, the rates get adjusted periodically.
When this happens, your rates fluctuate with the interest rates. Your rate becomes unpredictable and more difficult to plan for. If floating rate vs. fixed rate is compared, fixed rates are better for budgeting.
3. Interest-Only Mortgages
Interest-only mortgages work by allowing you only to pay interest, leaving the principal to be paid later. Here are the risks of an interest-only mortgage.²
- Inability to refinance or sell due to very little home equity
- Financial burden when the interest-only period ends as you’ll need to pay high principal over a shorter term if you fail to raise it as a lump sum.
- You’ll end up paying way more than the value of the home.
4. Low Down Payment Loans
A low down payment works well when you can’t raise a considerable amount, and loans in programs such as the Veteran Affairs (VA) & Federal Housing Administration (FHA) loans have a low foreclosure rate. However, should house prices drop, you might not be able to sell or refinance, and that’s not a good situation to be in.
Risky Mortgage Types: The Difference Between Fixed and Floating Rates
Floating rates may favor you when interest rates go down, but it can be difficult to budget and plan for such an expense. Fixed rates with a reasonable term are best suited for public employees with regular income. They offer a consistent repayment rate and are suitable for building home equity.
“About Mountain West Financial and the CalPATH Home Loan Program
Mountain West Financial is the exclusive lender offering CalPATH, the #1 home loan program for Teachers, Police Officers, Firefighters, and other public employees who serve our local California communities.
You may contact our CalPATH Hotline @ 800-310-7577, seven days a week from (8:30 am to 8:00 pm). A CalPATH advisor will be standing by to answer (any & all) questions you may have about the home buying or refinance process.
We look forward to working with you soon!
Sincerely, Joe Moore – Branch Manager”
Links to External Sources:
- A guide to the financial crisis — 10 years later https://www.washingtonpost.com/business/economy/a-guide-to-the-financial-crisis–10-years-later/2018/09/10/114b76ba-af10-11e8-a20b-5f4f84429666_story.html
- Here’s How Interest-Only Mortgages Work https://www.forbes.com/sites/taramastroeni/2019/08/26/heres-how-interest-only-mortgages-work/?sh=2bf6e22f70fc