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TERMINOLOGY

There are a number of high-risk mortgages that can potentially cause problems for you as a home buyer. If you are getting ready to purchase a home, you will want to be aware of some of the consequences of using these types of mortgages. Here are a few different types of high-risk mortgages.

Option ARM

One type of high risk mortgage is the option ARM. This is an adjustable-rate mortgage that gives you an option on which payment you want to make every month. This type of loan is also referred to as the "pick a payment" loan. You will be able to make a full mortgage payment with principal and interest, an interest-only payment, or a minimum payment that is actually less than the interest that is accruing. This type of mortgage can be very dangerous because many people continuously choose the minimum payment. When you do this, the amount of interest that you do not pay is added onto the balance of the loan. After a certain amount of time, they are going to re-amortize the loan and you will get a much bigger mortgage payment for the rest of the loan.

Adjustable-Rate Mortgages

Adjustable-rate mortgages are also very popular in the lending industry today. With this type of mortgage, your interest rate is going to fluctuate from one year to the next. This means that your monthly payment is going to fluctuate as well. Many people have trouble dealing with these mortgages because they do not know how to budget for a changing payment. Over the course of the loan, your payment might double or grow even higher. With this type of loan, it is very hard to predict what the interest rate is going to be in the future.

Negative Amortization

You could also sign up for a mortgage that has negative amortization. This means that you are actually paying less than the amount of interest that is being charged every month. The lender will take the interest that you don't pay and add it to the balance of the loan. This means that if you do not pay enough, you actually borrow more money every month. At some point, you are going to have to repay this money and it is going to give you a very large mortgage payment to deal with.

Interest-Only

Another high risk mortgage is an interest-only loan. With this type of mortgage, you are only going to make a mortgage payment that is equal to the interest that is accruing each month. With this type of mortgage, you are never actually going to address the principal of the mortgage until the end of the term. If you had a 30 year mortgage, you would make interest-only payments for 30 years. Then at the end of the 30 years, you have to make one large balloon payment to pay off the entire balance that you borrowed originally. Most people do not end up saving enough money to pay for this balloon payment and end up refinancing.