How To Get Home

Risk is the term used to describe the potential negative impact to something of value that might occur based on some future event. The 30 year fixed-rate mortgage has very little risk. You know with 100% certainty, that your principle and interest will remain constant for the next 360 months. Some borrowers who plan to be in a home long term or who have a low tolerance for risk might want to seriously consider the 30 yr fixed-rate.

The mortgage industry and loan programs have become more complex over the last few years. Nontraditional mortgages (interest-only and pay option ARM’s) when used correctly can allow certain borrowers to have greater flexibility with their financing. The most important thing is to understand your loan options AND the risk associated with them. It is the responsibility of the lender to make sure the client understand the risks associated with any loan program. If you do not feel like your lender is giving you all the information about your loan program or is presenting it in a very biased way, find out for yourself about the risk of certain loans.

Sure it is easy to focus on the low initial interest rates associated with some loan programs, but you have to understand how these payments can very over time. Having more loan options is a good thing. It helps more borrowers match their financial situation with a payment schedule that works for them. Unfortunately, far too many buyers have used pay option ARMs as a way to buy more home than they can truely afford. When these ARMs start to adjust, the buyer needs to be prepared for the payment shock that could occur.

Again, I am not trying to say that any one specific loan program is a bad thing. When a buyer does not consider the risk of a particular loan and how that could have a negative impact on their financial health, then you have a problem. The ultimate defensive play is a 30 yr or even a 40 yr fixed-rate loan. Picking a variable rate program requires you to ask the right questions and understand the risk.