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As interest rates have begun to creep back up after such a long period of low interest rates and the tantalizing mortgages that correspond to any kind of low interest period, interest has increased in mortgages touting low down payments or low monthly payments. These mortgages often have wrinkles to them that work creatively to appear attractive to prospective home buyers and have spawned continued growth in many real estate markets around the country just as in the real estate market.
Non-Traditional Mortgages and Its Effects
Before getting involved in something other than a traditional mortgage, there are some things you should know about the rise of these non-traditional mortgages and the long-term effects they can have. You have most likely been skeptical of the attractive claims home loan agencies have made, but hopefully explaining some of the key points of these mortgages will clear up some of the confusion.
Some key economic factors have built up a demand for non-traditional mortgages. As income rates have increased, wages have not necessarily in all areas and that leaves more prospective home owners looking for an inexpensive solution to the hurdles they face to home ownership. Especially in areas where real estate prices are high, alternative loans offer a way to purchase a home that may not exist in traditional real estate loans.
The alternative loans are complex and have a wide range of features and options. Some offer low payments in return extremely long terms. Some offer a small down payment requirement. Some offer the ability to skip payments every once in awhile. That environment of complexity is a breeding ground for lenders that use creative financing options to get consumers into a home they may not otherwise be able to afford. That is a problem.
Interest-only loans are one such classification of alternative loans, offering lowering payments as only interest is paid until a specified date sometime in the future when the principal kicks in. These can offer a convenient solution to some consumer that may be able to rely on a raise in salary or other boost down the road, but want to own a home now.
However, that is not always the typical person that gets involved in an interest-only loan as they are marketed to a wider demographic than that. It is there where things get sticky as people may not fully understand the future ramifications of their current low monthly payments.
To be clear, while there are mortgages out there other than a typical 30-year, fixed-rate mortgage, those alternative payment structures are a good fit for a very small portion of the population. The danger in them is getting involved when you are not a part of the demographic that is most likely to benefit without fully understanding the terms and conditions. Especially in an economic atmosphere where long-term, fixed-rate mortgages still offer a great financing solution, that risk can often not be worth it.
Always Read the Fine Print
So, as you hear news about relatively new types of loans such as interest-only loans or payment-flexible plans, make sure that you get the fine print as well. One common factor in these types of loans is that a payment increase is built in somewhere along the course of the loan and for those not expecting it or planning for it, that increase can cause extreme financial strain. These loans also affect the speed of equity build-up and what kind of interest rate fluctuations you are likely to experience.
Get together with any kind of financial consultant you may use to decide what kind of loan is best for you. While there are risks involved in these types of alternative loans, they do offer workable solutions to those that are uniquely set up in their financial state to benefit from such a structure. Find out if you are, if not, get ready for the old 30-year, fixed-rate solution.
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We respond right away! -Colleen Lane, Realtor®
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