3 High Risk Mortgages to Avoid

There are a number high risk mortgages on the market that you should avoid at all costs. A high risk mortgage presents you with an opportunity that may seem attractive on the front end. However, when you examine it a little more closely, it is not quite as good as it seems. All of a sudden you find yourself in a very high risk situation. Therefore, you should do everything that you can to avoid a high risk mortgage. Here are a few types of high risk mortgages that you should stay away from.

1. Interest-Only Loans

One of the riskiest types of loans out there is the interest-only loan. With this type of arrangement, you will often be enticed by the more affordable mortgage payment each month. Since you will only be paying the interest on the mortgage, the payment will be lower each and every month for the life of the loan. 

While it is nice to have a lower payment, you will be blindsided at the end of the mortgage term. You will then be responsible for the entire loan amount. Therefore, if you got a $200,000 mortgage, you could pay the mortgage faithfully for 30 years and then at the end of the loan have to come up with $200,000 all at once. If you don't the house belongs to the bank. 

In addition to the shocking end to the loan, you will also not develop any equity over the course of the loan. Building equity is one of the main reasons to buy a house in the first place. Otherwise, you might as well be renting a house instead. 

2. Adjustable Rate Mortgages

Another type of high-risk mortgage is an adjustable rate mortgage. With an adjustable rate mortgage, you do not have a fixed monthly payment at some point. Your interest rate is tied to a certain index such as the prime rate that is currently in the industry. 

The reason that many people opt to go with an adjustable rate mortgage is that initially you will have a lower payment. For a certain period of time, you will have a fixed rate on the mortgage. For example, you might have five years of a fixed rate, followed by an adjustable rate period. So for five years, you reap the benefits and then you are at the risk of the market. 

Many people that have agreed to adjustable rate mortgages over the years have found that their payments have doubled over time. Most people could not afford their mortgages if they were significantly higher than they are now. However, this is exactly the situation you might be in with an adjustable rate.

3. 50 Year Mortgages

This type of loan is similar to the interest-only loan because you build equity so slowly. It is a little bit better than interest-only but not by much. Many people end up getting this type of mortgage so that they can get a bigger house. It ends up overextending them and their budgets.