Don’t Be Tricked into Assuming a Risky Mortgage Loan
Some mortgage lenders earn their living by working on commissions. They make more money by closing a lot of loans and reaching lofty sales goals. They’re not in the business of putting their customers’ best interests into the equation.
The type of mortgage you choose can mean the difference between owning your home outright one day or finding yourself in the middle of a foreclosure or even worse, a bankruptcy a few years into your loan term.
Is there a way you can avoid falling into these loan traps - a way that won’t be too risky for you?
The answer is “Yes”. The first way to avoid a mortgage nightmare is to speak with a local, community mortgage lender, someone you can sit down with face-to-face to weigh different loan options and terms, if you choose; or someone you can call up or chat with via email or text. If your loan company is only available online at some distant location, that should be your first red flag that they may not have your best interests at heart.
The mission of First National Bank’s (FNB’s) mortgage lenders is to build a trusted relationship with their clients, ensuring everyone is treated respectfully and fairly. You can freely ask questions and receive accurate information about the different loan options. That way you can make a decision that is a good fit for you.
Avoid these five risky loan types
One of the most important lessons the world learned from the subprime meltdown of 2008 is that everyone should proceed with caution when borrowing money to purchase or refinance a home. Certain types of mortgages are inherently risky (a loan product or term that doesn’t correspond to the borrower’s ability to repay it).
These five loan types can be risky for the borrower and lender.
- Adjustable-rate mortgages (AMRs). These mortgages have a fixed interest rate for an initial term (ranging from six months to 10 years). This initial rate is sometimes called a “teaser” rate. It is often lower than the interest rate on a 15- or 30-year fixed loan. After the initial term, the rate adjusts periodically. This may be once a year, once every six months, or even once a month. If interest rates rise, your monthly payments increase. The extra expense could be more than you can afford.
- Fixed-rate mortgages longer than 30 years. The longer your borrowing period, the more interest you end up paying.
- Interest-Only Mortgages. If you take out an interest-only loan (excluding 1-year loans for persons who are constructing their homes), you are assuming a significant risk. What is happening with this type of loan is you are pushing out the payment on principal. Your monthly payment covers only the interest on the mortgage for the first 5-10 years, then you typically face a balloon payment, which requires full payment of your loan or refinancing of your loan. This can be extremely risky because you may not be able to afford the higher monthly payments when the interest-only period ends. You may not be able to get a refinancing loan when the balloon payment is due.
- Interest-only ARMs. There is another interest-only product offered by a few lenders - an interest-only adjustable-rate mortgage. The interest-only ARM takes two potentially risky mortgage types and combines them into a single risky product.
- No or low-down payment loans. Putting zero down (VA loan) or 3.5% (FHA loan) down may seem like a lower risk. But the problems with making a low down payment is that if home prices drop, you can get stuck in a situation where you can’t sell or refinance your home because you owe more than it’s worth on the market. The common phrase for this scenario is called being “upside down” on your mortgage loan.
While many of the high-risk loan types, like the interest-only ARM, are no longer offered by the vast majority of lenders, there are still plenty of ways to end up in an unfavorable mortgage if you get a loan that isn’t right for you.
Speak with a FNB mortgage lender and get the facts about mortgage loan options that are less risky and a better fit for you.