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:
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?
