For most people, the biggest investment they will ever make will be their home. To afford a home, purchasers usually become a party to a mortgage agreement. A mortgage allows buyers to make payments over a long period of time to be able to afford a home. Increasingly, the media is reporting that due to the economy, many people are losing their homes. While the economy has played a role, there are common mistakes that can result in or contribute to foreclosure and bankruptcy.
To avoid mortgage mistakes, buyers need to know what the mistakes are. While not limited to the following, these mistakes represent some of the more costly and dangerous ones. Practices to avoid include the use of adjustable rate mortgages, buying with little or no down payment, amortizing the loan for longer than 30 years, getting involved in reverse mortgages, and entering into agreements involving non-standard mortgage products.
Adjustable rate mortgages are a great deal, if home values increase. With an ARM, rates are initially set low and purchasers enjoy affordable payments. At the end of two to five years, the rate increases. If home values have increased, the owner can refinance using equity from the increased value. However, if the value has decreased, refinancing may not be possible. Higher rates result in higher payments and payments that were once affordable can become overwhelming.
No down payment is a mistake that can hurt all parties. The borrower has no equity and has higher payments than they would with a down payment. For lenders, borrowers with no down payment are riskier. With little or no equity, it is easier for borrowers to walk away. This is particularly true for those whose property value has declined to the point that the borrower owes more than the house is worth.
For years, a 30-year mortgage was the longest term a purchaser could obtain. Now, it is common to see 35-40 year mortgages. This results in lower mortgage payments. However, over the life of the loan more interest is paid. In fact, for 10-20 years very little equity accrues because so much is being paid to interest. With minimal equity, it becomes harder to sell a home.
Reverse mortgages are for those 62 and older. With a reverse mortgage, the equity in the property is paid out as a stream of monthly income or as a lump sum. They are costly to obtain. Also, with no equity left, the bank becomes the owner of the home. If the borrower dies, everything must be paid off before any equity can be returned to the family. This can be very problematic if family members still live in the home.
Finally, non-standard mortgage products can result in unanticipated situations. These products allow the borrower to dictate the specifics of the loan including the amount of the payment. In return, a large balloon payment usually comes due. Ultimately, a negative equity situation can be created as well.
Home ownership is the dream of many and many have managed to buy a home. Unfortunately, it is often easier to buy a home than it is to keep a home. Avoiding the five mortgage mistakes above is one way to make sure that a home remains where is belongs, with its owners.
To avoid mortgage mistakes, buyers need to know what the mistakes are. While not limited to the following, these mistakes represent some of the more costly and dangerous ones. Practices to avoid include the use of adjustable rate mortgages, buying with little or no down payment, amortizing the loan for longer than 30 years, getting involved in reverse mortgages, and entering into agreements involving non-standard mortgage products.
Adjustable rate mortgages are a great deal, if home values increase. With an ARM, rates are initially set low and purchasers enjoy affordable payments. At the end of two to five years, the rate increases. If home values have increased, the owner can refinance using equity from the increased value. However, if the value has decreased, refinancing may not be possible. Higher rates result in higher payments and payments that were once affordable can become overwhelming.
No down payment is a mistake that can hurt all parties. The borrower has no equity and has higher payments than they would with a down payment. For lenders, borrowers with no down payment are riskier. With little or no equity, it is easier for borrowers to walk away. This is particularly true for those whose property value has declined to the point that the borrower owes more than the house is worth.
For years, a 30-year mortgage was the longest term a purchaser could obtain. Now, it is common to see 35-40 year mortgages. This results in lower mortgage payments. However, over the life of the loan more interest is paid. In fact, for 10-20 years very little equity accrues because so much is being paid to interest. With minimal equity, it becomes harder to sell a home.
Reverse mortgages are for those 62 and older. With a reverse mortgage, the equity in the property is paid out as a stream of monthly income or as a lump sum. They are costly to obtain. Also, with no equity left, the bank becomes the owner of the home. If the borrower dies, everything must be paid off before any equity can be returned to the family. This can be very problematic if family members still live in the home.
Finally, non-standard mortgage products can result in unanticipated situations. These products allow the borrower to dictate the specifics of the loan including the amount of the payment. In return, a large balloon payment usually comes due. Ultimately, a negative equity situation can be created as well.
Home ownership is the dream of many and many have managed to buy a home. Unfortunately, it is often easier to buy a home than it is to keep a home. Avoiding the five mortgage mistakes above is one way to make sure that a home remains where is belongs, with its owners.
