Avoidable Pitfalls of Subprime Mortgage Loans

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Dealing with subprime mortgage loans is not something that many people look forward to. The subprime market is there for those with bad credit and for non-traditional loans. If you have to deal with the subprime mortgage market, there are a few things that you need to be aware of. Here are some avoidable pitfalls to watch out for with subprime mortgage loans.

Balloon Loans
One of the biggest pitfalls that people have trouble with is in the area of balloon loans. Subprime mortgage lenders are notorious for offering balloon loans. At first glance, a balloon loan looks pretty attractive. Your payment is smaller, and it can still be a long-term loan. It will get you the house that you want and you don't have to worry about shopping around for a mortgage anymore. However, upon further inspection, you can see that this has the potential to be a financial disaster for you.

With a balloon loan, you only pay the interest on the loan during the payment period. You make a monthly payment and none of your payment goes towards retiring the loan balance. You are paying a lower payment than if you had a 30-year fixed mortgage, but you're not getting anywhere. Once the end of the loan term comes around, you find yourself in a dangerous situation. You now have to come up with the full balance of the loan all at once. Let's say that you bought a $200,000 house with this loan. At the end of the loan, you now have to come up with $200,000 immediately. If you don't, they take the house back and your credit will be permanently damaged. You might have to sell the house or take other drastic measures just to keep the house. If you refinance after 30 years, you are back to square one. You now have a $200,000 mortgage and a 30-year-old house. 

Adjustable Rates
Many banks offer adjustable rate mortgages. Many of them come with a fixed rate for the first five years and then the rate becomes adjustable. With traditional lenders, the rate can only increase so much every year. It can also only get to a certain percentage before it is capped out. With some subprime mortgage lenders, they will offer loans that do not have these caps for your protection. You might have an adjustable rate mortgage right from the beginning. You never know what your interest rate will be from one year to the next.

Therefore, it becomes increasingly difficult to budget each year. By the time you get a few years into your mortgage, you might be staring at a payment that is double what you used to pay. With uncertainty like that in your financial life, it becomes almost impossible to plan for the future. If you can avoid these types of mortgages, your financial future will look much brighter.