Originally published August 6 2005
Low payments risk financial insecurity
by Mike Adams, the Health Ranger, NaturalNews Editor
Many bank and mortgage companies offer low payment methods to snare potential home buyers. But what they don’t mention is the fact that while payments are sometimes low, they can reach so high they break the bank and people end up paying more than their house is even worth.
Don't worry about a crushing payment hike down the road, or that you'll end up owing more than your home is worth.
If only the ads were so honest.
But in today's frenzied real estate market, buyers think they can make big money on first, second or third homes.
And lenders are eager to help them finance their bets with loans that are the toxic waste of the mortgage industry.
The common denominator: They offer a cut-rate-payment option that eventually can leave the homeowner owing more than was borrowed.
As home prices soar, option adjustable-rate mortgages are hot because their low initial payments make it possible to qualify for larger loans.
A typical option ARM starts at as low as 1 percent, compared with nearly 6 percent on a standard, 30-year fixed-rate mortgage.
The unpaid portion of interest increases the remaining debt, causing interest charges to rise in subsequent months.
HSH figured how this would have worked on a typical option ARM taken out in June 2003 for $100,000.
Had this person borrowed the same amount with a fixed-rate loan at 6 percent - and a $600-per-month payment - the debt would be cut to about $93,000.
In theory, the option ARM might work well for some borrowers, such as those who will have their loans for only a brief time and those with fluctuating incomes and enough discipline to make some bigger-than-required payments to offset the small ones.
An option ARM also might work for one who could use the minimum-payment option to free up cash for an investment profitable enough to outweigh the growing mortgage debt.
Many will be hammered if interest rates rise and home prices don't go up enough to match these borrowers' ever-increasing debts.
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