With the real estate market in such bad shape, lenders have tried a lot of short-term fixes to get more business. In short, banks are tightening their requirements and finding it hard to find lenders willing to take on the high payments that come with high interest rates. What has been their chosen answer? They want to get people to get a mortgage loan by making the payment much lower. This may seem like a good idea at first, but it has caused problems for borrowers and the market as a whole. People who take out cheap mortgage loans hurt their finances in the long run and don't even know it.
What are these low-cost mortgage loans that have become so popular? People think they are getting a good deal because they have nice names for them. If a lender talks about "interest-only" loans or loans with no down payment, you can be sure that something is wrong. These mortgage loans go by a number of different names, and each one has its own pros and cons. You can be sure that the good things about the loans are the ones that potential borrowers are told about first.
The problem with these loans is that they don't move people any closer to owning a home than renting one would. But, unlike when they rented, they now have a huge loan. That huge loan is just sitting there, and the person is only paying the interest on it. At first glance, lowering the payment by a lot might seem like a good idea, but it hurts a person's long-term financial prospects a lot. A banker is the only person who benefits from such a deal.
A person can put himself or herself in a lot of danger and risk by taking out these mortgage loans. What happens if you lose your job or something else unexpected happens? Then you have to pay back a loan that is bigger than what you have in your bank account. In this case, the bank is likely to take your house away, and your family will have to move. After that, your credit will be so badly damaged that it will be almost impossible to fix. All of this is done while you aren't even making any money on your home.
This is another problem with cheap mortgage loans like the interest-only loan. People miss out on the benefits that come with having equity in their home. Since the value of your home will almost certainly go up over time, it makes a lot of sense to invest in it. After all, this is pretty much an investment that can't go wrong. With some equity in your home, you also have your own insurance policy in case something bad happens. You could always take out a loan against your equity to pay off a big bill or invest in something else.
Long-term loans are another type of risky loan. These are gimmick mortgage loans that let the buyer stretch out the term over 40 or 50 years instead of the standard 30 years. This makes it easier to make the payment, but it costs a lot in interest payments. When you promise to do something for 50 years, you're really just promising to pay the bank a lot of interest. There is too much uncertainty in the world today for you to put yourself in that situation. Most people who buy homes don't know what they're going to do tomorrow, let alone 50 years from now.
How do these things affect the overall market? It just makes it harder to borrow money. Almost everyone loses when that happens. People who want to sell their homes can't because there aren't enough qualified buyers. People can't buy homes because interest rates have gone up too high. When these people can no longer pay for their cheap mortgage loans, the market will suffer. When this happens, banks and other lenders lose money, interest rates start to go up, and the whole system starts to fall apart. Even though there are checks and balances in place to keep the market from falling apart completely, even a small drop in productivity has long-term negative effects.
Borrowers who are smart will stick to standard mortgage loans and not bother with tricks. Paying a lot of interest to the bank is not a good thing to do when that money could be used for much better things. Don't give up your long-term financial stability for smaller payments. Instead, try to look at your situation from a bigger picture. Getting a mortgage loan is one way to make sure your future is safe. Don't throw it away by giving in to cheap deals.
