Danger: Non-Traditional Loans
Beware of risky "exotic" mortgages. These nontraditional loans are not appropriate for the majority of borrowers:
Interest-only loans seem attractive because they let you make a lower interest-only payment during a temporary introductory period. Unfortunately, this doesn't repay the original loan amount (principal) and your payments will shoot up dramatically when the intro period ends.
Zero-down loans don't require a downpayment, which means that when you sell or refinance you may lose money if your home has not increased (appreciated) in value. Many homebuyers have actually ended up owing money when they sell because the value of their homes has gone down.
2/28 or 3/27 Loans
For 2 or 3 years, these loans start with a low interest rate that jumps to a much higher rate, which may adjust every six months. The higher-and-higher payments can put you at risk of losing your home.
Subprime lenders charge higher rates and fees to people with damaged credit, and often target lower income, senior or minority borrowers. These loans often contain unfair or deceptive (predatory) terms, such as pre-payment penalties (hefty fees for paying the loan off early).
Consumer Action's Housing Information Project created this brochure in partnership with Capital One Services, Inc. © 2007 Consumer Action. Rights Reserved.