Here is CNN/Money's list of the five riskiest mortgages and a table showing the percentages in selected regions. I have one of these:
Just how crazy are crazy mortgages? Check these out:
- How it works: In the first three to 10 years, your payments cover only interest, not principal.
- The risk: When the interest-only term is up, your payments could increase so much that you can't afford your mortgage.
- Right for you if...You plan to move before the term ends, or you can count on earning more money soon.
Option- or flexpayment ARM:
- How it works: You choose what to pay every month: the standard principal and interest, only interest or a minimum that's less than what's needed to cover the interest.
- The risk: If you make minimum payments, the rest of that month's interest is tacked on to the loan balance , so you could easily end up owing more than your home is worth.
- Right for you if...You need the flexibility to make smaller monthly payments once in a while -- but only once in a while.
40-year fixed mortgage:
- How it works: You pay the loan off over 40 years instead of the usual 15 or 30.
- The risk: You will pay more interest over the term of the loan. Plus, it takes a loooong time to build equity.
- Right for you if...You can't afford a shorter-term loan but don't want to take on a lot of interest-rate risk.
- How it works: By taking out two loans (a traditional mortgage and a home-equity loan or line of credit for the 20 percent down payment) you can avoid private mortgage insurance.
- The risk: If the price of your house drops, you have no equity cushion, leaving you at risk of owing more than your home is worth.
- Right for you if...You have money saved for a down payment but fall a little short of 20 percent.
No-doc or low-doc loan mortgage:
- How it works: This loan lets you borrow without proving you meet the usual income requirements and, in some cases, without documenting your income at all. Most lenders expect you to have a credit score of at least 620.
- The risk: Borrowing more than you can afford. Plus, depending on your credit score and how much documentation you provide, the rate may be one-half to three points higher than an equivalent full-doc loan.
- Right for you if...You don't earn enough to qualify for a normal loan (say, if you're starting a business), but you know you won't have trouble making the mortgage payments.
Here's the table showing geographic regions with new-home buyers with interest-only and option payment ARMs in the first six months of 2005:
resorting to creative financing.
|Metro area||% Buyers with
|Santa Cruz/Watsonville, Calif.||55|