How risky can you afford your mortgage to be?

By Justin Hunter

Everyone hopes to one day own a home. Unfortunately most people do not have the necessary funds to make this happen. Even with a traditional mortgage, many Americans struggle to come up with a large enough down payment that will allow for a manageable monthly payment.

There are many other options, other mortgages (usually referred to as nontraditional) to get financing for a home. But with these nontraditional mortgages comes nontraditional, or risky, terms which may or may not be beneficial for your particular situation.

The article, “Types of High Risk Mortgage” written by Joseph Kenny and posted on jumboloanrates.net, provides information on a few risky mortgages which may help you decide whether you should wait until you have the necessary funds for a traditional loan.

“As the cost of houses continues to increase, fewer people are able to afford them. Many creditors have responded to this situation by creating a new class of mortgages that are quite risky. A large number of people have begun getting these mortgages, and the payments are generally low when you first get the loan.”

The riskiest loan available is the option payment mortgage. This loan allows you to decide just how much you want to pay each month. You can pay the principle, interest or minimum amount allowed by the lender. However, there is a chance that you will end up paying much more than you anticipated over the life of the loan. The longer it takes to pay off, the more interest will have to be paid.

The next risky mortgage is the interest only mortgage. “As the name implies, this is a mortgage with which the borrower pays interest on the loan for a set number of years. This could be ten years, and at the end of the ten years the borrower would begin making payments on the principle.”

The significant risk of this mortgage is that the payments that will include your principle charge will be substantially higher than your interest only payment. As a result, you may not be able to afford and thus default n your monthly payments. It is only wise to get this mortgage is you are low on funds now and know that you will be receiving a lump sum of money in the near future.

A piggy back mortgage is a loan in which two mortgages are taken out which equal more than 15 percent of the value of the home. “This percentage is paid towards the home in order to avoid paying for mortgage insurance. This can be risky, because if the value of your home falls you will have to sell it for a price less than what you borrowed. You also don't have any equity that can be used to protect you. This mortgage should only be used when you have a large down payment but want to avoid paying for mortgage insurance.”

The last type of well-known risky mortgage is the forty year fixed mortgage. This option provides you a fixed rate for 40 years instead of the traditional 30, resulting in a lower monthly payment for a longer period of time. Unfortunately, through this mortgage you will most likely significantly overpay for your home.

Banks and lenders have realized that everyone wants a home and will do or pay just about everything to obtain one.

“You should never get a mortgage on a home that is outside of your price range. You should look and your income and decide what you can afford. If you get an Adjustable Rate Mortgage you should calculate how much your payments will be monthly in the interest rate suddenly increases. It is generally best to go with a mortgage that has a fixed rate.”

You can always make your monthly payment lower, but is it worth the risk?

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