Specialty Mortgages: Risks and Rewards
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.REALTOR.org/housingopportunity.
For more information on predatory mortgage lending
practices, visit the Center for Responsible Lending at
www.responsiblelending.org.
