As the cost of houses continues to increase, fewer people are able to afford them. Many creditors have responded to this situation by creating a new class of mortgages that are quite risky. A large number of people have begun getting these mortgages, and the payments are generally low when you first get the loan. In this article I will discuss these mortgages in detail, and what you should know about them.
Option Payment Mortgage
The most risky mortgage option available today is the Option Payment Mortgage. With this mortgage you decide how much you want to pay each month. You can pay either the principle, interest, or minimum amount allowed by the creditor. The danger with this type of mortgage is that you could end up paying more money than your home is worth. Those who fee that they are responsible with their personal finance should only use this mortgage.
Interest Only
The second type of risky mortgage is the Interest Only Mortgage. As the name implies, this is a mortgage with which the borrower pays interest on the loan for a set number of years. This could be ten years, and at the end of the ten years the borrower would begin making payments on the principle. The risk with this mortgage is that the payments for the principle will be much larger than the interest, and the borrower may not be able to afford it. The mortgage companies and banks win because the borrower has already spent years paying on just the interest without touching the principle.
The Interest Only Mortgage should only be used in either a situation where you are 100% certain you will make enough money to make the principle payments, or you don't plan on living in the house after the interest has been paid. A Low Doc mortgage is one in which you are loaned money despite your qualifications. The danger with this mortgage is that the borrower may take out loans, which they can't afford. You should only get a Low Doc Mortgage if you are making a large enough income to pay it.
Piggy Back Mortgage
The Piggy Back Mortgage is a type of loan in which two mortgages are taken out which equal over 15% of the value of the home. This percentage is paid towards the home in order to avoid paying for mortgage insurance This can be risky, because if the value of your home falls you will have to sell it for a price less than what you borrowed. You also don't have any equity that can be used to protect you. This mortgage should only be used when you have a large down payment but want to avoid paying for mortgage insurance.
Long Term Fixed Mortgage
The last type of risky mortgage is called the Forty Year Fixed Mortgage. With this loan you get a fixed interest rate, but will pay off the loan over a period of 40 years instead of 30. Your payments will be lower, but it will take a long time to build up equity in your home. The main risk with this mortgage is that you may end up paying a lot more for your home over the long term. Now that banks are allowing just about anyone to get a home, it is important to make sure you protect yourself.
Only Buy What You Can Afford
You should never get a mortgage on a home that is outside of your price range. You should look and your income and decide what you can afford. If you get an Adjustable Rate Mortgage you should calculate how much your payments will be monthly in the interest rate suddenly increases. It is generally best to go with a mortgage that has a fixed rate.
Joseph Kenny owns and writes for the UK loan comparison and information site, http://www.ukpersonalloanstore.co.uk and provides more information on remortgage loans available on site.