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Risky Mortgages You Should Be Careful with

Now that you have found the home of your dreams you are considering various alternatives to finance the purchase. One of them, the most commonly used, is through mortgage. The mortgage market is full of offers with many risks attached to them. Thus, you should examine them carefully to make a wise choice. Some types of mortgages have hidden implications you should be cautious of. This article will provide you with information on the mortgages you should be careful with.

  • Adjustable Rate Mortgages

    As their name implies, these mortgages have interest rates that change. If the rates decrease, it may be good that you have selected an adjustable rate mortgage. Since you are facing higher risk for the rate going up you are rewarded with a lower starting rate. On the other hand, if interest rates increase, your monthly payment can rise drastically as well.

  • Option ARM Loans
  • This type of mortgage is usually classified as one of the most dangerous. Even though they provide you with the flexibility of how much to pay when payment is due, you can easily get into trouble.

  • Interest Only Loans

    Since you are not paying down the principal you can pay less every month. Interest only loans allow you to establish an amortization schedule of your choice. On the other hand, you don't build equity as long as you pay only the interest. Thus, if you want to sell your home, but it has lost its value you may have to write a check.

Generally any type of loan that causes negative amortization is risky. Such loans allow for lower payments that don't cover the interest due over a given time period and thus increase your balance. The trap is that what you owe in the beginning of the period is lower than what you have to pay at the end.

Despite their negative sides, the above loans may be suitable for your condition. However, in most of the cases people tend to fail to realize their negative impacts. So, careful and thorough evaluation of the involved risks is needed before you apply for any of these mortgages.

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