Two Types of Mortgage to Approach with Extreme Caution

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Two Types of Mortgage to Approach with Extreme Caution

Oops!!One of the most common reasons Americans give for filing for bankruptcy is an inability to keep up with mortgage payments. Predatory lending practices—those that pressure or confuse borrowers into accepting deals that are unreasonably expensive and difficult to keep up—are a major part of the mortgage problem.

Predatory mortgages lead to foreclosure more often than traditional mortgages do, and cause a great deal of stress and hardship for those who do manage to keep their homes. In our two-part overview of predatory lending, we told you about four major red flags to watch out for with any type of loan. In the mortgage industry, the most clearly predatory practices are becoming uncommon or even illegal.

Still, some practices remain which often lead to financial problems, and even foreclosure. It’s arguable whether these types of mortgages are actually predatory, but they are certainly dangerous. Both are gambles, and both make it easy to lose track and be surprised by large payments due later. With careful consideration, you may still decide that one of these mortgages is best for your situation, but these must always be approached with extreme caution:

Mortgages with balloon payments

A balloon payment is a large sum—much higher than the regular monthly payment—that comes due at the end of a mortgage. These plans have a high rate of foreclosure for a clear reason: Balloon-payment mortgages encourage borrowers to focus on the size of the monthly payment, not on whether they can afford the entire mortgage.

If you can save up enough money to make that big, final payment, this kind of mortgage can work for you. But, even with careful planning problems like job loss, major medical expenses, or other financial issues can come up during the life of the loan, making it impossible to save up enough for that huge final payment.

Interest-only mortgages

These mortgage plans allow the borrower to pay only interest, not any of the principal, in their monthly payments for a set period of time—usually five years. After that time, both interest and principal will be included in the monthly payments, so the payments will be  noticeably higher for the rest of the life of the mortgage.

Like balloon-payment mortgages, interest-only mortgages make it easy to focus on the initial monthly payment, and be surprised when larger payments kick in later. Plus, waiting to pay on the principal means paying more interest over the term of the loan, making this type of mortgage more expensive overall.

Interest-only mortgages are attractive to first-time homeowners, who may be surprised by maintenance and repair costs during the first year, and to people with uneven income, including entrepreneurs and people who work on commission. Having the option to pay only interest makes those early payments easy to handle. The danger is that, when the full payments are required, the borrower won’t be able to keep up.

To find out the best solution for your financial situation, reach out to us today. We are glad to help.

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