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The Harsh Reality of Bad Credit Mortgage Loans


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TERMINOLOGY

Bad credit mortgage loans allow those with less-than-perfect credit to obtain a home. For some people, these loans provide a second chance to get the home that they need. However, these loans allow others to avoid having to fix their credit issues and eventually get into worse debt. There are drawbacks that should be reviewed carefully before taking a bad credit loan. High rates, costs and dangerous terms should all be examined closely because sometimes there are much better solutions.

Prey on the Weak

The truth about bad credit mortgage loans is that many lenders prey on those that need the most help. Their business practices are sometimes illegal and do not help the borrower at all. Many times, they simply serve the purpose of getting people further in debt and hurting their chances of improving their credit. With all of the promises that are offered, coupled with instant gratification, it is easy to see why people with bad credit can be lured into bad decisions. The bad credit lending industry has a reputation of causing further debt and can hurt you even worse so that they can reap a little bigger profit along the way.

Higher Interest Rates

If your credit score is bad, you will not have access to the favorable interest rates that borrowers with good credit have. Lenders may still lend to you, but you may pay three to five percent more interest than someone with a better credit score getting the same loan. This makes your payment bigger and more challenging. However, the thought of owning a home is the American dream and is often a large marker of success that people desire. So buyers agree to the high interest rates anyway, against their better judgment. The high interest loan is all they can get, but it often does more harm than good.

Dangerous Terms

There is a plethora of loan options in the marketplace for you to choose from. While your options may be fewer than someone with good credit, you still have your fair share of loan programs available. The lender may not be willing to give you a low interest rate on a traditional 30-year fixed mortgage. However, they might be able to offer you a payment that you can afford with an adjustable rate mortgage or a balloon loan. An adjustable rate mortgage is like gambling on the interest rate. You don't know what the rate will be in five years, so basing your financial decisions on this is not a smart move.

With a balloon loan, you are just asking for trouble. They will tell you that you simply have to pay the interest on the loan every month. Then at the end of the time period, you have to pay off the principal of the loan. This can get you in way over your head and result in needing to come up with thousands of dollars to pay off the balance or lose your home.