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Specialty Mortgages:
Risks and Rewards |
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In
high-priced housing markets, it can
be difficult to afford a home.
That’s why a growing number of home
buyers are forgoing traditional
fixed-rate mortgages and standard
adjustable-rate mortgages and
instead opting for a specialty
mortgage that lets them “stretch”
their income so they can qualify for
a larger loan.
But before you choose one of these
mortgages, make sure you understand
the risks and how they work.
Specialty mortgages often begin with
a low introductory interest rate or
payment plan — a “teaser”— but the
monthly mortgage payments are likely
to increase a lot in the future.
Some are “low documentation”
mortgages that come with easier
standards for qualifying, but also
higher interest rates or higher
fees. Some lenders will loan you 100
percent or more of the home’s value,
but these mortgages can present a
big financial risk if the value of
the house drops.
Specialty Mortgages Can:
Pose a greater risk that you won’t
be able to afford the mortgage
payment in the future, compared to
fixed rate mortgages and traditional
adjustable rate mortgages.
Have monthly payments that increase
by as much as 50 percent or
more when the introductory
period ends.
Cause your loan balance (the amount
you still owe) to get larger each
month instead of smaller.
Common Types of Specialty
Mortgages:
-
Interest-Only Mortgages:
Your monthly mortgage payment
only covers the interest you owe
on the loan for the first 5 to
10 years of the loan, and you
pay nothing to reduce the total
amount you borrowed (this is
called the “principal”). After
the interest-only period, you
start paying higher monthly
payments that cover both the
interest and principal that must
be repaid over the remaining
term of the loan.
-
Negative Amortization
Mortgages: Your monthly
payment is less than the amount
of interest you owe on the loan.
The unpaid interest gets added
to the loan’s principal amount,
causing the total amount you owe
to increase each month instead
of getting smaller.
-
Option Payment ARM
Mortgages: You have the
option to make different types
of monthly payments with this
mortgage. For example, you may
make a minimum payment that is
less than the amount needed to
cover the interest and increases
the total amount of your loan;
an interest-only payment, or
payments calculated to pay off
the loan over either 30 years or
15 years.
-
40-Year Mortgages:
You pay off your loan over 40
years, instead of the usual 30
years. While this reduces your
monthly payment and helps you
qualify to buy a home, you pay
off the balance of your loan
much more slowly and end up
paying much more interest.
Questions to Consider
Before Choosing a Specialty
Mortgage:
-
How
much can my monthly payments
increase and how soon can these
increases happen?
-
Do I
expect my income to increase or
do I expect to move before my
payments go up?
-
Will
I be able to afford the mortgage
when the payments increase?
-
Am I
paying down my loan balance each
month, or is it staying the same
or even increasing?
-
Will
I have to pay a penalty if I
refinance my mortgage or sell my
house?
-
What
is my goal in buying this
property? Am I considering a
riskier mortgage to buy a more
expensive house than I can
realistically afford?
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