High Cost Types of Mortgage Loans

by admin on November 17, 2013

High cost mortgage loans are risky in that borrowers may be unable to keep up with their monthly payments. They are usually offered to individuals with no or little exposure to credit and those with tarnished credit who are considered high risk by financial institutions.

Features of High Cost Loans

These types of loans come with a higher fees and points or interest threshold or both. The threshold is different depending on the mortgage type and property, i.e. whether it is a mobile or second home, first home, etc. Another problem relates to written disclosures. Financial institutions are required to provide written disclosures to persons who apply for a high cost mortgage. The problem is that they are often long and include legal jargon and vague wording. The disclosure contains important information such as the repayment term, fees and penalties, annual percentage rate, and other details.

Balloon Mortgages

Some types of mortgages are expensive simply because the terms make repayment difficult. One example is the balloon mortgage. There are certain issues to consider before applying for financing, and one is that the full amount is due at the end of the term. Borrowers are attracted to this type of loan because it often features a low, fixed interest rate. The repayment term is shorter compared to other products, which means that borrowers pay less in interest. Typically, balloon mortgages come with a term of 5 to 7 years. Because of the fact that the full amount is due at the term, this loan is ideal for borrowers who expect a substantial increase in their income and those who expect to receive a big sum, i.e. from the sale of real estate, investment instrument, and so on.

One benefit for borrowers is that the mortgage can be refinanced. Those who are unable to pay off the outstanding balance can choose from different options such as refinancing or resetting. At the same time, there is a higher risk of foreclosure. It is not the large lump sum payment only, but the borrower may not qualify for refinancing. Borrowers who intend to sell the property to repay the loan may be unable to do so in a timely fashion.

Other Types of High Risk Mortgages

Whether a mortgage is risky or not depends on the borrower’s risk tolerance. Products such as negative amortization, adjustable rate, and option ARM are considered high risk loans. Negative amortization means that the borrower pays less in interest charges over a certain period. While this arrangement makes payments more affordable, borrowers owe more toward the end of the month. The option ARM is also risky because you are allowed to pay little or a lot. Many people choose to pay less and get in trouble. With adjustable rate mortgages, the problem is that interest rates fluctuate and the monthly payment increases when the rates go up.

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