The best defense against a bad mortgage is avoiding loans that can quickly ratchet up the monthly payment. Mortgages like these can give you a "payment shock":
2/28s and 3/27s. A 2/28 or 3/27 adjustable rate mortgage gives the borrower a fixed payment for the initial two- or three-year period before becoming an adjustable rate mortgage. After the initial period, your mortgage payments typically adjust up, often substantially, every six months.
Interest-Only. An interest-only mortgage lets you pay only the interest on the loan for the first 5 or 10 years and nothing to pay off the loan amount (principal). After the interest-only period, the mortgage requires much higher payments covering both interest and principal that must be repaid over the remaining years of the loan.
Payment Option Adjustable Rate Mortgages. "Payment option" mortgages allow a number of different payment options each month, including paying less than the amount of interest due. The unpaid interest gets added to the total owed, which over time can quickly snowball into an unaffordable loan. When the unpaid portion comes due, these mortgages can have an especially big payment shock.
Comments(0)