Looking for different types of home loans can sometimes be a tough task especially when you consider all of the different lenders out there and all of the different options that they can give you.
However, there are at least two options you should never consider when it comes to getting a mortgage. In this article I’m going show you what they are in order to stop you from making some of the same mistakes I did with these types of mortgages.
No Equity Loans
First off you’ve got home loans with no equity. These loans are disadvantageous for several reasons. They can have higher interest rates, the terms will be tougher, and they are bound to be more fees like private mortgage insurance. 95 mortgages are a “borderline’ case – but can be acceptable in some situations as a little bit of equity is there.
No equity loans have also been known to exceed the 100% loan to value mark and run as high as 125% loan to value. With 125 home equity loans you will not only have zero equity in your home, but you can have a much as 25% more than the value of your home in wrapped-up in loans. This is clearly not a good idea is because if you decide to sell your home you will have to have anything that is over 100% the loan to value of the home paid off.
Option ARM Mortgages
This mortgage can cause a lot of problems and is a risky loan to get. An option ARM mortgage is very similar to a regular adjustable rate mortgage but with one difference. This mortgage gives you the option to choose from four different payment options. The first option is a 15 year payment option, the second is a 30 year payment option, the third is an interest only option, and the fourth is a negative amortization option.
The problem with this mortgage is that the interest only and the negative amortization option are a lot less than the 30 year or the 15 year option. Which means if you would happen to get into a pinch you could make a smaller payment for the time being. However what happens is money gets tight and we never get back to making the bigger payment like originally planned.
What’s even worse is that the negative amortization payment will actually add principal to your loan balance. This payment option makes a payment less than the interest that is owed in a given month and tacks the remaining amount onto the balance of the loan. Over time this could add thousands of dollars to your loan balance.
As you can see these two loans are not the best loans to have (like 40 year mortgages) and can cause a lot of problems for you if you’re not careful. So the best advice for getting a loan is if you don’t understand how the loan works don’t get it.