How To Avoid Mortgage Pitfalls

There comes a time in just about everyone's life when they will try to obtain a mortgage. Becoming a homeowner is part of the American dream, but sometimes the excitement gets in the way of paying attention and not really understanding the type of mortgage you are getting. This is basically why there is now a high foreclosure rate and the industry of mortgage loans has become one that is in a heap of trouble. Paying attention to the terms of the mortgage you are getting, whether it is a mortgage to buy a home or a mortgage refinance, is one way to avoid future problems.

One of the major reasons the foreclosure rate has skyrocketed over the last several years is due to the obscene amount of ARM's that borrowers have taken on. An ARM is an adjustable rate mortgage. This type of mortgage was mostly given to sub-prime borrowers, meaning they were given to people who had less than perfect credit. While they may seem like a good deal at the time, these adjustable rate mortgages usually present future problems. Many unfortunate consumers are now dealing with and are why the foreclosure rates have been so high over the last several years.

An adjustable rate mortgage starts with a low rate, but that rate is only valid for a specific period of time. Typically, the term of the initial rate is anywhere from 90 days to 36 months. Once this period is over the interest rate on the mortgage will be based on the prime rate at the time plus a couple of percentage points, which all depends on the terms of the mortgage note you have signed. Not only have these loans affected home buyers, but also those who have taken out mortgage equity loans and even those who have done a home loan refinance.

What many fail to realize is that once the interest rate goes up, so will the monthly payment. Depending on the new rate, this could mean paying hundreds of dollars more each month. For example, instead of paying $1200 per month, once the rate changes the payment could be $1500, $1600, or more. This is what has brought about the inability of many consumers to continue to make their mortgage payments and sent the foreclosure rates through the roof.

Another problem that has effected those who have taken out mortgage loans in the last several years is that of balloon mortgages. These loans can also present a problem because similar to an ARM. The terms of this loan change once the balloon payment becomes due. With this type of mortgage, you can get a good rate to begin with, but after a specific number of months there are no longer monthly payments that are required on the mortgage.

Instead, the total loan amount becomes due. This means that if you can not refinance the mortgage prior to the balloon payment coming due, you will be required to somehow come up with the money to pay off the entire loan. How many people can actually accomplish this? It's no wonder the foreclosure rates have gotten as bad as they are.

To avoid the pitfalls of these mortgages. You need to know what you are signing and make sure the terms of the mortgage will not hurt you in the future. It doesn't matter if you have good credit or poor credit. Shopping around for a mortgage and making sure the terms fit your needs not only now, but in the future, is important.

Things can go wrong no matter if it is a purchase, mortgage refinance, or mortgage equity loan. There are many mortgage companies that want your business, so shop around. Don't get sucked into a deal that seems to good to be true or just because you trust that your mortgage rep knows what is best for you. Doing your homework will help you find the right mortgage without having to subject yourself to something that will come back to haunt you in the future.

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