Option ARM loans are probably the most dangerous type of mortgage. These loans give you a lot of flexibility when your monthly payment is due: pay a little or pay a lot. However, you can get in trouble very easily.
Adjustable rate mortgages allow your loan’s interest rate to fluctuate. This works in your favor if rates go down. In addition, you sometimes get a lower starting rate because you’re sharing more risk with the lender. Unfortunately, the rate can go up and make your monthly payments skyrocket.
- Learn more about Adjustable Rate Mortgages
Negative amortization loans let you pay less than the interest due over a given period of time. These may be option ARM loans, for example. The problem with negative amortization is that you owe more at the end of the month than you did at the beginning of the month.
Interest only loans give you the ability to pay less each month because you’re not repaying principal. You can set up your own amortization schedule. However, you can also end up without any equity in your home – and possibly have to write a check if your home loses value and you want to sell it.
Any of these loans may be appropriate for you. Unfortunately, they get used more often than they should. Lenders allow buyers to get in over their heads. Sometimes buyers do it to themselves because they want to buy more than they can really afford. If you’re thinking of using one of these loans, make sure you evaluate the risks and you know what you’re getting into.
A safer mortgage loan might be a fixed rate mortgage.
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