Low Mortgage Rates for Smart Loan Shoppers
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Low Mortgage Rates for Smart Loan Shoppers |
Take a Look at the Absolute Worst Mortgageby Jonathan HaeberCMR Columnist The banks love to trick people into paying more than their mortgage interest rate says they should be paying. We've heard the words before, but may not know what they mean: negative amortization, balloon payments, interest only, no down payment, ARM. Brace yourself: I'm going to tell you about the worst home mortgage imaginable. According to MSN Money, the worst imaginable mortgage is the "interest-only, payment skipping/minimum-payment-option-enabled, negatively amortizing, no-money-down, no documentation, prepayment-penalizing, 3-month LIBOR 40-year adjustable-rate mortgage with a balloon." It's quite a mouthful, but that's not all it is. Details of the Worst MortgageLet's begin with the interest-only element of the loan. This is the most common type of mistake people make. Though it's a convenient loan for young homeowners who know their income will increase, the interest only loan also traps people into paying only the minimum on their home mortgage; this means that if you follow the payment schedule, you'll never build equity on your home. If the market is bad enough, your home may even drop in value, and you will owe money to the bank after its sale.In addition, if you have an interest only loan with a minimum payment option, which allows you to make a minimum payment on your loan (much like a credit card), you often end up paying less than the actual interest payment. This means that the amount of debt actually increases, and you lose equity in your home. Losing equity is known as "negative amortization." No Money Down? No Problem!Often, banks will offer you a mortgage loan based on "no money down" and "no documentation." Basically, you don't need to prove your income (no documentation), and you don't even need to put down a minimum payment before the loan can be approved. Though this may sound nice, it also puts you at higher risk of defaulting on your loan if you lose your income.That brings us to the balloon payment and prepayment penalty parts of the worst mortgage ever. A prepayment penalty increases a homeowner's risk of foreclosure by 20%; a balloon payment increases that same risk by an additional 46%. Prepayment penalties make refinancing to a lower-priced loan difficult by charging you a fee for doing so. Balloon payments force the mortgagee into refinancing, simply because a balloon payment is a final payment that is much, much larger than the monthly payment. The Incredible, Growing Interest Index!The last aspect of this loan is the three-month LIBOR adjustment. The LIBOR index is the mortgage interest rate marker that adjusts every three months. This means that your mortgage interest rate will actually increase multiple times each year (but only if the associated index, like the Fed, increases its rate).As you can see, all of these mortgage options allow greater flexibility for the borrower, but they also come at a price. Each one adds risk to your home mortgage, and when combine, they should be avoided at all costs. Source MSN Money: The World's Worst Mortgage 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. © 2006 CMR. All rights reserved. |