The home loan mortgages to avoid are :
- Interest only loans
- Adjustable Rate Mortgages (ARM’s)
- Balloon Loans
The reason to avoid Interest only loans is because you never pay any money towards the principal loan amount that you borrowed. You’ll never payoff that loan.
Adjustable Rate Mortgages provide a low rate and payment in the beginning of the loan- usually the first 3 to 5 years. For example, right now you might get an initial rate on a home loan of 3.75%. This means your payment is lower. Using $200,000 at 3.75%, your payment would be $926.23. That difference in payment from a fixed loan of 5.25% might qualify you for a larger home. In the beginning, this might seem very attractive. However, after a few years, the ARM disappears and the rate will be fixed at whatever the prevailing market rate is at the time. Who knows what that rate will be. I can bet it will not be lower.
ARMs were created for the benefit of the lenders not the borrowers. The lenders are passing on the risk to you.
Variations of this include a jumbo loan where the entire principle has to be refinanced at the end of a defined period. You can also get a rate that changes each year for a certain amount of years. This one is usually capped at no more than a 1 or 2 point change yearly and a 5 to 6 point change over the life of the loan.
Balloon loans are short-term loans, between five to seven years. Balloon mortgages generally have lower interest rates and monthly payments than other mortgages. Although they resemble traditional fixed mortgages, balloon loans are not paid off at the end of their term: the mortgage holder must instead make a large payment to cover the remainder of the principal. If you cannot afford to payoff the principal, you then need to refinance your home or sell it. Unless you expect to have a significant amount of money when the balloon loan comes due, avoid these loans.
