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Bad Credit Culprits: Mortgage Terms that Put You Underwater
By Jonathan Haeber
CMR Columnist
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Really, there are only three reasons a person puts themselves in bad credit standing: 1. They lose their job, and can no longer make the payments. 2. They overestimate the payments they can make and go even further into debt. 3. They don't know how to budget.
Numbers 2 and 3 are loosely tied together. People are more likely to overestimate the payments they can make because they aren't aware of their own budget. People also can get a false sense of security in their new-found equity. Many end up underwater in debt because they were given a Home Equity Line of Credit for more than the equity in their home. Today, we'll look at what I consider to be the three most common mortgage terms that put people into bad credit standing:
- Reverse Mortgages: With a reverse mortgage, your minimum monthly payment is less than the interest the bank charges for that month. What does that mean? You guessed it: With every month that passes by, you end up even more in debt.
- HELOCs: Home equity lines of credit are perfect for home improvements, or to pay for tuition, or other cash generating investments. However, most people think of a HELOC as a low-interest credit card. Even though you can write off the interest on your taxes, you still have a whopping debt to pay off.
- Interest Only Mortgages: There was a time when interest only mortgages were an exotic type of mortgage. Those days have passed. Today, they are the status quo. Why? Because people can't otherwise afford the home they plan to buy. It's better to buy a smaller house than to end up not building equity in your home. Remember that.
If you've chosen to take one of these three mortgage terms, especially the reverse mortgage, then consider yourself a prime candidate for bad credit standing. How do you avoid becoming another statistic? A good refinancing strategy could bring you back up out of the water.
About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.
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