If you are looking for a home in a high-priced housing market, 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?
Learn about the NATIONAL ASSOCIATION
OF REALTORS® Housing Opportunity Program at www.REALTOR.org/housingopportunity.
For more information on predatory mortgage lending practices, visit the Center for Responsible Lending at www.responsiblelending.org.