Types of High Risk Mortgage

Understanding Risky Mortgage Options

As housing costs continue to rise, many prospective buyers find themselves priced out of the market. In response, lenders have introduced several high-risk mortgage products, often appealing due to their initially low payments. However, these mortgages come with significant risks. Here’s an overview of the most risky mortgage options and what you should consider before committing.

1. Option Payment Mortgage

The Option Payment Mortgage is one of the riskiest mortgage types available. With this mortgage, you have the flexibility to choose your monthly payment amount. You can opt to pay just the interest, the principal, or a minimum amount specified by the lender. The primary risk is that by paying only the minimum amount, or even just the interest, you might end up owing more than the value of your home. This mortgage is best suited for financially disciplined individuals who can manage the variable payments responsibly.

2. Interest-Only Mortgage

An Interest-Only Mortgage allows borrowers to pay only the interest for a set period, typically up to ten years. After this period, you begin repaying the principal, which results in significantly higher monthly payments. The risk is that these future payments might be unaffordable, potentially leading to financial strain. This mortgage should be considered only if you are confident in your ability to meet the higher principal payments in the future or if you do not plan to stay in the home long-term.

3. Low Doc Mortgage

A Low Doc Mortgage, or Low Documentation Mortgage, is issued with minimal documentation regarding the borrower’s income and financial situation. While this can be advantageous for those with non-traditional income streams, it also increases the risk of overextending financially. This type of mortgage should be pursued only if you have a substantial income and can comfortably manage the loan repayments.

4. Piggyback Mortgage

A Piggyback Mortgage involves taking out two separate loans to cover over 15% of the home’s value, typically to avoid paying mortgage insurance. The primary risk here is that if the home’s value decreases, you might owe more than the home’s current market value, and you won't have equity to protect you. This type of mortgage is most suitable for buyers with a significant down payment who wish to avoid mortgage insurance costs.

5. Forty-Year Fixed Mortgage

The Forty-Year Fixed Mortgage extends the repayment period to 40 years while offering a fixed interest rate. Although this results in lower monthly payments, it also means you will build equity more slowly and end up paying significantly more in interest over the life of the loan. This mortgage can be beneficial if you need lower payments but be prepared for the long-term financial implications.

Guidance for Borrowers

Regardless of the mortgage type you choose, it is crucial to only borrow what you can afford. Assess your income realistically and ensure that you can manage the payments, especially if opting for an Adjustable Rate Mortgage where rates can increase. Generally, a fixed-rate mortgage is a safer choice for long-term stability.

Conclusion

Mortgage options have become more diverse, but with greater flexibility comes increased risk. Ensure you thoroughly understand the terms and implications of any mortgage before committing. Consult with a financial advisor to help determine the best mortgage product for your financial situation and long-term goals.