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The Dangers of a Subprime Second Mortgage


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TERMINOLOGY

If you are considering getting a subprime second mortgage, there are a few things that you will need to consider first. While this strategy can give you access to the property that you need, there are some potential dangers to be aware of.

Overextension

One of the possible dangers of using a subprime second mortgage is that you might overextend yourself financially. Subprime lenders do not take as much care when it comes to qualifying applicants. They take on mortgages that are risky as a regular part of doing business. They might determine that you can technically afford a second property. However, when it comes down to it, you have actually extended yourself beyond what you can afford. This will ultimately lead to a lot of frustration and potentially the loss of the property. If a traditional lender tells you that you do not make enough money to afford the property, you might want to consider that advice.

Questionable Terms

Many subprime mortgages carry with them questionable terms. Because of these terms, many borrowers have found themselves in serious trouble down the road. For example, many subprime mortgages will give you an option to make only interest payments on your mortgage. The entire monthly payment will go towards addressing the interest, and none of the payment will go towards paying off the principal of the loan. This allows you to get a cheaper payment and potentially afford a second property. However, when the loan matures, you still have the entire balance of the loan to address. This will require you to refinance the loan, or you could potentially lose the property. Make sure that you understand how the loan works before you agree to anything. You also need to put some thought into the future consequences of the loan instead of focusing solely on the here and now.

Negative Amortization

Another common occurrence when dealing with subprime mortgages is negative amortization. Negative amortization occurs when a mortgage payment does not fully cover the interest that is accruing on the mortgage on a monthly basis. This means that you are making a very small mortgage payment that does not pay even for the interest that you are accruing. When this happens, the interest that you do not pay will be added onto the balance of the principal. You are essentially increasing the loan balance and borrowing more money each and every month. Many borrowers do not take this into consideration when they sign-up for a mortgage, and it ends up costing them in the long run. If they cannot afford to make full mortgage payments when the loan starts, there is no reason to believe that they will be able to make even larger mortgage payments a few years down the road. Make every effort to stay away from loans that could create negative amortization for you.