Which Mortgage Types Should Be Avoided?

Written by: Arron J. Staff writer @ Hyggehous.com

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When you're getting into the world of home buying and mortgages, there's a lot of information to sift through and understand.

There are actually different types of mortgages to choose from too which could make a big difference in the long run. There are different types of mortgages for different borrowers, so there is something that fits pretty much any situation. Most of the problems that arise when it comes to mortgages happen because the type of mortgage is not being matched with the right borrower. Shop Tiny Homes Lenders tend to tell potential borrowers that they can always refinance, but this is only true if the value of houses is rising, not if they are declining. We saw this happen in the crash of 2008 when there were more foreclosures on homes than ever before. After 2008 the Mortgage Bankers Association's National Delinquency Survey showed that in the second quarter of 2010, subprime adjustable rate mortgages (ARM) had a foreclosure start rate of 3.39%. This type of loan is especially risky because of the changing interest rate although even fixed-rate mortgages can be tricky for borrowers. Like the 40-Year Fixed Rate Mortgages for example which tend to increase the interest the longer you borrow money. The long term loan may save you money in the short term, but it will be higher in interest which means that it will cost you more over the life of the loan. This could put you at the risk of not having enough for retirement or not having enough money for medical bills and so on. It could end up costing you over $100,000 in interest fees over the life of the loan depending on the amount of the loan and the interest rate.

The next type of mortgage that should be avoided when possible is the Adjustable-Rate Mortgage (ARMs).

These mortgages have a fixed interest rate for a short term spanning anywhere from 6 months to 10 years. It's usually called a teaser rate because it's lower than the interest rate on a 15 or 30 year fixed loan. After the first term, the rate will then adjust over time, and that could be anytime over the duration of the loan. It could be every month, each year or every six months so if the mortgage has a fixed interest rate for a time period that is shorter than the entire term of the loan that is a big risk to take. If the interest rate increases the monthly payments will also increase which isn't ideal and can cause financial problems for the borrower. Interest-Only Mortgages are the other type of mortgage you want to watch out for. With this Mortgage type, the borrower only pays interest on the mortgage for the first 5 to 10 years which makes the payments lower for that time period. This can be great for real estate investors because they only own the home for a short time before selling it again. IO mortgages are also fine for those who have an irregular income with the ability to increase in the future, but only if they are able to make higher payments as they can afford it. The thing is, the interest rates are usually higher on these mortgages than the fixed-rate mortgage.

Low Down Payment Loans also seem great at the start because they allow you only to have to put down a small percent, this can be attractive for those who don't have a lot of extra cash, but this can also lead to getting stuck with a situation where you can't refinance or sell a home if the house prices in your area drop.

Another mortgage type you may want to avoid is the Interest-Only ARM where the interest rate is not fixed, but it can go up or down depending on the current market interest rates. This type takes two of the risky mortgage types and makes them into one mortgage product. These loans can be very unpredictable and are often not the best choice for those who don't have the money to take the uncertainty that comes along with this type of loan. The best way to find a mortgage that works best for your situation is to talk with a financial advisor or to do your own research and weigh the pros and cons of each choice.