Risky Loans Tempt Homebuyers

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As mortgage interest rates rise, homebuyers like you may be wishing for easier, cheaper loans to obtain, but any loan that isn’t conventional or government-guaranteed could put you at greater financial risk. Remember the Great Recession of 2008? It was the first and only time that unsustainable mortgage loans resulted in a nationwide housing crisis.

National Association of REALTORS chief economist Lawrence Yun says that rising yields in U.S. Treasuries explain why mortgage interest rates are exceeding 7% for a 30-year fixed-rate mortgage.

In response, borrowers are returning to adjustable-rate and hybrid loans, interest-only loans, and 2-1 buydowns. The danger for borrowers is much higher mortgage interest rates and bigger mortgage payments when the loans reset. However, borrowers can save money if they choose the right loan product and correctly estimate how long they’ll occupy their homes and refinance or sell their homes – before rate adjustments get too high. 

Fixed-rate mortgages (FRMs) have the same interest rate for the life of the loan. Adjustable-rate mortgages (ARMs) adjust periodically with caps on how often the rate can change and how much higher the rate can go beyond the initial FRM rate. A hybrid loan has an initial fixed rate for a term of one, five, seven or ten years, then converts to an adjustable rate at the end of the term. Typically, homeowners stay for about 10 years before selling, so a 10-year term allows them to enjoy the benefits of a FRM at a much lower cost.

Article courtesy of bhhs.com