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Choosing the right mortgage, and avoiding the wrong ones can affect our financial future more than we realize when we sit down at talk about different loans with lender. We all want our real estate purchases to be dependable and not turn on us when our economy changes. First, you will want to know what choices could turn out to be the wrong ones that can affect our real estate market:
The Adjustable Rate Mortgage.
Most lenders offer what is called an Adjustable Rate Mortgage. Just like the name describes, the rate can change at any point, based on an index that the average person would not keep track of. People are initially enticed into these types of mortgages by low interest rates and rising prices of homes. There is a false sense of security that the interest rate will stay that low, when it actually does not. As the interest rate finally rises, the owner finds themselves with a new interest rate that is driving up their montly mortgage to more than they can afford.
The Balloon Payment.
This type of loan allows a buyer to pay a lower monthly amount on their loan up to a specified number of years. After that point, a large lump sum is due at the date of maturity. Ideally, the home owner will get a new loan to pay off the old loan and continue on making payments with no problems. However, when the real estate market declines, the house will not appraise for the original amount owed on the loan. If the owner doesn't have thousands on hand to make the balloon payment and the lender will not renegotiate, the home owner can find themselves in a tough financial predicament.
Everything was going perfectly a few years ago. House prices were constantly on the rise, most people had equity that just kept coming, and lenders took advantage of it by trying to get everyone to refinance. Lenders get a commission for getting owners to refinance, so they tempted home owners by offering to let them take some of their equity out when they get their new loan. Many people took the lender's advice and used the money to to fix up their homes, go on vacations, put their children through college, or for any number of reasons. It works well if prices keep rising, or stay the same, but when the market starts to decline, not only do home prices decrease, it affects the entire economy, including jobs. People also get scared and stop buying so much, causing job loss and a cycle of a declining real estate market.
Action & Reaction.
It's unfortunate that people who have been convinced by lenders to accept these loans find themselves with a home that isn't worth what they are paying for it and when the economy declines and they are unable to keep up the payments. If the home owner doesn't have a lot of built up equity, it will make it almost impossible to sell a house without owing money to the lender afterwords. Some people have job transfers or need to move back near their families in different states, but can't sell their house because there is no equity in the property. This leaves the owner with an old house to pay for with an upside down mortgage and a new house at the same time, forcing the owner to make payments on both, or decide to short sale, or foreclose. Oftentimes, trying to rent a house from another state can be difficult, especially when housing prices are coming down and most renters are buying instead of looking for a property to lease.
Choose The Righ Loan.
When working with a lender to purchase a new home, go for a fixed rate loan, even if the adjustable rate mortgage offers a much lower monthly payment at the time. Look out for loans with balloon payments and even if prices start to rise again, don't assume that trend will continue for the next five or ten years. Lastly, once you have the home of your dreams with a good mortgage you can handle, don't be tempted to refinance and take money out unless you absolutely need it. In doing so, be aware that there is a real possibility that you may end up caught up in an upside down mortgage in the future because of it. Knowing some of the main causes helps us foresee what can happen again in the future and do our best to prevent it. We can share this information with our friends and loved ones and make a difference in their financial future also.