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?
Be
sure you work with a REALTOR® and lender who can discuss different
options and address your questions and concerns!
Learn
about the NATIONAL ASSOCIATION OF REALTORS® Housing Opportunity
Program at www.REALTORS.org/housingopportunity. For more information
on predatory mortgage lending practices, visit the Center for
Responsible Lending at www.responsiblelending.org.
Reprinted
from REALTOR® Magazine (RealtorMag.Realtor.org)
with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright
2008. All rights reserved.