The news media reports every day on the amount of foreclosures sweeping the nation as more and more people find themselves unable to pay their mortgage and being forced from their homes. Although a portion of the foreclosures are due to people losing their jobs or crippling medical bills, a larger portion of the foreclosure mess is due to people signing mortgages with terms that they did not understand to buy homes that they could not afford. If you are looking for a home in the current market, it is important that you know how to avoid the common mortgage traps that have caused so many problems for so many people in recent years.
Mistake #1 – Signing Up For Adjustable Rate Mortgages
Adjustable rate mortgages, or ARMs, have become a dirty word in many financial circles because of the mess that they have created in the housing market. Adjustable rate mortgages may seem like an attractive option for some people because the initial interest rates may be lower than those for a fixed rate mortgage and the lender may tell you that you will save money if the interest rates go down. But your payments will increase if the interest rate goes up, sometimes dramatically, and if you are already stretched thin, you may not be able to afford the higher mortgage payments.
Mistake #2 – Signing Up For Interest Only Mortgages
Interest only mortgages are used by lenders to help people buy more home than they can truly afford. The mortgage holder makes the interest payment for the loan only for the first year or so of the mortgage agreement, which is often less than half of the amount that they really should be paying because they are not paying any of the principal of the loan. Once the principal of the loan reaches a certain percentage, payments on both the principal and the interest of the loan become due, often skyrocketing the payment to well above what the mortgage holder can afford to pay.
Mistake #3 – Signing Paperwork Without Reading It
This is the trap that many people who obtain mortgages fall into and is the hardest to remedy if you come out on the bad end of the deal. Although the paperwork for obtaining a mortgage is long and the lender may reassure you that everything is fine with the paperwork, it is important for you to read every word of the documents. This will ensure that you are getting the rate that you were promised, that there are no hidden fees added to the total, and that you know exactly what the terms of the mortgage will be. Do not get bullied or coerced into signing paperwork for a mortgage loan without reading it first.
Mistake #4 – Signing Up For A Mortgage Product You Don’t Understand
There have been many different types of exotic mortgage products created in recent years designed to qualify people for mortgages that they would not have qualified for under normal mortgage terms. Many of the people that have signed up for these exotic mortgages and have gotten in financial trouble have found that they would have qualified for a traditional loan for a lower amount of money but the lender never disclosed this to them, so they signed up for mortgages with terms that they did not understand hoping for the best. If you do not understand a mortgage product or the lender is unable to explain the terms to you in a way that clears up the confusion, chances are that you should not be signing up for that loan and if the lender tries to pressure you into signing, you should look for another lender.