One of the biggest lessons the world learned from the subprime meltdown of 2008 is that we should proceed with caution when borrowing money to purchase or refinance a home. The type of mortgage you choose can mean the difference between owning your home outright one day or finding yourself in the middle of a foreclosure or even 澳洲幸运5官方开奖结果体彩网:bankruptcy a few years into your loan term.

Is there a way you can avoid falling into the latter? You can certainly do so by choosing a mortgage loan you can comfortably repay.

What Makes a Mortgage Risky?

Many people have come to believe that certain types of mortgages are inherently risky, mainly because of the housing crisis. In fact, some of the mortgages available on the market weren't especially risky for the right consumers.

A risky mortgage is a loan product that doesn't correspond to the borrower's 澳洲幸运5官方开奖结果体彩网:ability to repay it.

In 2008, certain mortgage types were matched with the wrong borrowers, and lenders were reeling them in with the prospect of refinancing soon. This꧑ may have worked when home prices were rising, but not when home values started to 💟drop.

With their changing interest rates, adjustable-rate mortgages (ARMs) are a particularly risky choice f🧜or borrowers with less-than-ideal financial sit♛uations.

Some fixed-rate mortgages can also be problematic und🎃er the wrong circumstances.

40-Year Fixed-Rate Mortgages

Borrowers with 澳洲幸运5官方开奖结果体彩网:fixed-rate mortgages don't live with uncertainty, but that doesn't mean these mortgages are al𝓀ways a good idea. That's because you end up paying more in the long run. The longer your borrowing period, the more interest you end up paying.

Here's a hypothetical situation. Let's say you want to buy a $300,000 home with a 10% 澳洲幸运5官方开奖结果体彩网:down payment. You'll need to borrow $270,000 ($300,000 minus $30,000). At an 澳洲幸运5官方开奖结果体彩网:interest rate♛ of 7%, here are the monthly payments and the total amount you'll pay for the home under various terms if you keep the loan for its life:

So, if you don't refinance and keep the loan as is, you'll pay $535,375 in interest alone by the end of the 40-year period. This is a simplified comparison. The interest rate will probably be lower for the 15-year loan and the highest for the 40-year loan.

Below is a more realistic comparison using interest rates based on t꧂he term⛎ of the loan.

As you can see in the second chart, the 40-year mortgage is 0.35% higher in interest than the 30-year mortgage. That lowers your monthly bill by only $49 a month, from♈ $1,796 to $1,747. However, it will cost you a whopping $191,855 more over the life of the loan.

That's a big chunk of money that could go to fund your retirement or to pay for your children's college education. At best, you're forgoing monet you could have spent on vacations, home improvements, any other expenditures.

Adjustable-Rate Mortgages (ARMs)

Adjustable-rate mortgages (ARMs) have a 澳洲幸运5官方开奖结果体彩网:fixed interest rate for an initial term ranging from six months to 10 years. This 澳洲幸运5官方开奖结果体彩网:initial interest rate, sometimes called a 澳洲幸运5官方开奖结果体彩网:teaser rate, is often lower than the inte🔯rest rate on a 15- or 30-year fixed loan. After the initial term, the rate adjusts periodically. This may be once a year, once every six months, or even once a month.

Loans with a fixed rate shorter than their terms are prone to 澳洲幸运5官方开奖结果体彩网:interest rate risk. If interest rate🌼s rise, your monthly payments increase. Depending on your circumstances, that could be an extr🦄a expense you can't afford.

This degree of unpredictability is a problem for many people, especially those with 澳洲幸运5官方开奖结果体彩网:fixed incomes and those who do♋n't expect their incomes to๊ rise.

ARMs become even riskier with 澳洲幸运5官方开奖结果体彩网:jumbo mortgages because the higher your principal, the more a change in interest rate will affect you🌱r monthly payment.

Keep in mind, though, that adjusta𝄹ble interest rates ca🌊n fall as well as rise. ARMs can be a good option if you expect interest rates to fall in the future.

Interest-Only Mortgages

If you take out an 澳洲幸运5官方开奖结果体彩网:interest-only mortgage, you are pushing out🥃 the payment on the principal of the loan to a later date. Your monthly payment covers only the interest on the mortgage for the first five to 10 years.

The attꦆraction is the lower monthly payment for 𝓡those early years.

If you are very sure that your income will significantly increase in the future, an interest-only mortgage may be a good idea for you. Or perhaps you're a real estate investor who wants to reduce your 澳洲幸运5官方开奖结果体彩网:carrying costs and intends to own the home for only a short period of time.

Of course, there is a downside. The interest rate on an interest-only mortgage tends to be higher than the rate you would pay on a conventional fixed-rate mortgage because people default on these loans more often.

Why You Might Not Want an Interes𒉰t-Only Mortgage

An interest-only mortgage can be extremely risky for one or more of the following reasons:

• You may not be able to afford the significantly higher monthly payments when the interest-only period ends. You'll still be paying interest, but you'll also be repaying the 澳洲幸运5官方开奖结果体彩网:principal over a shorter period than you would with a fixed-rate loan.
• You may be unable to refinance if you have little to no 澳洲幸运5官方开奖结果体彩网:home equity.
• You may not be able to sell if you have little to no home equity and home prices decline, putting you 澳洲幸运5官方开奖结果体彩网:underwater on the mortgage.
• Borrowers with interest-only loans pay significantly more interest over the life of the loan than they would with a 澳洲幸运5官方开奖结果体彩网:conventional mortgage.
• Depending on how the loan is structured, you may face a 澳洲幸运5官方开奖结果体彩网:balloon payment at the end of the loan term.

Any of these problems could cause you to lose ⭕your home in a worst-case scenario. Even if none of these problems apply, the loan could cost you much more than you really need to pay ⭕to be a homeowner.

Interest-Only ARMs

There's also another interest-only product on the market—the 澳洲幸运5官方开奖结果体彩网:interest-only adjusta🥂ble-rate mortgage. Like a regular ARM, the intere🔯st rate can rise or fall based on market interest rates♛.

Essentially, the interest-only ARM combines two potentially risky mortgage ty💧pes into a single risky produ🐬ct.

Here's an example of how this works: The borrower pays interest at a fixed rate for the first five years. Then, the borrower continues to pay interest only for the next five years, but the interest rate adjusts up or down annually based on market interest rates. For the remainder of the loan term—say, 20 years—the borrower repays a fixed amount of principal plus interest each month at an interest rate that changes annually.

Many people don't have the financial or emotional resilience to withstand the uncertainty of interest-only ARMs.

Low Down Payment Loans

Putting down only 3.5% because you're not willing to part with a lot of cash may seem like a lower risk. And that can be true.

Veterans Administration loans and 澳洲幸运5官方开奖结果❀体彩网:Fedeꦡral Housing Administration loans (FHA loans), which offer down payment options of 0% and 3.5%, respectively, have some of the lowest 澳洲幸运5官方开奖结果体彩网:foreclosure rates.

However, the problem with making a low down payment is that if home prices drop, you can get stuck in a situation where you can't sell or refinance the home. You owe more than it's worth on the market.

If you have enough money in the bank, you can buy yourself out of your mortgage, but most people who make small down payments on their homes don't have significant 澳洲幸运5官方开奖结果体彩网:cash reserves to do that.

The Bottom Line

While most of the loans that some mortgage lenders might consider to be genuinely high-risk, like the interest-only ARM, are no longer on the market, there are still plenty of ways to end up with a lousy mortgage if you sign up for a product that isn't right for you.