From 2000-2005 lending practices loosened up, enabling borrowers with bad credit to finance the entire cost of a house and only pay interest owed on a loan (or even part of the interest owed) for several years.
mortgages rates have increased and home values have slowed down, stopped and even declined in value. This has lead to big trouble for those who recently bought new or remodeled homes through these loan methods.
Risky Borrowing
According to a 2005 survey by the National Association of Realtors, 25% of all buyers financed 100% of the purchase price and 42% of first time buyers bought with no money down. This is striking when considering that a 20% down payment was once standard. There are many retro loans that can send young homeowners jumping out of their first floor windows.
Piggyback loans are common, usually through a home equity line of credit, and make sense if you can afford to make a regular mortgage payment, paying more than the minimum owed on a loan.
The problem is a home equity line of credit carries a variable rate and has no fixed payment schedule. If a borrower can only cover a minimum payment, the balance of the loan remains the same. Also, the interest to be paid is affected when the Federal Reserve raises short-term interest rates.
Interest only loans require that you pay only the interest due on a loan for the first 5-15 years of a plan. This typically makes the most sense for first-time home buyers whose incomes will likely go up in the next few years.
Minimum payment options present many options to consumers such as a cash flow ARM, option ARM and flex ARM, enabling borrowers to choose what works best on a monthly basis. Either the principal interest of a 30-year loan can be paid, pay only the interest due, or make a minimum payment and add the rest to the balance of the loan.
If only the minimum amount is paid, loan balances go up rather than down.
Those who are self-employed or rely on seasonal income often opt for this diverse loan type because their salaries are inconsistent. The abuse comes from those who use this option to test the limits of what can be affordable.
This worst-case-scenario has become a reality for many. Not only do you not own your home, but debts could exceed the actual value of the home. Interest rates may rise and property values can decline, which is happening is some areas.
