Mortgage Options to Avoid

from daveramsey.com on 03 Aug 2009

If you're about to sign on the dotted line for a mortgage, there are a few things you should know. Buying a house is a huge step, particularly if it's your first home. Always remember to hate debt when you buy a house. This will instill you with a passion to pay off your home early.

There are some ridiculous mortgage options available. If you're not familiar with the various plans, take time to educate yourself about the different choices so you don't make a mistake. No one wants their dream home to become their worst nightmare because they found out the hard way they couldn't afford their house.

Adjustable Rate Mortgages (ARMs)

An ARM is a mortgage with an interest rate that changes based on market conditions. The intention is to transfer the risk of higher interest rates to you and, in return, the lender gives a lower rate up front. This is a bad idea because you only pay interest. Since they can qualify for more home, many people find this mortgage appealing; however, the financial stress later on makes it a terrible option.

Reverse Mortgages

A reverse mortgage is when a homeowner borrows against the equity in their home and obtains monthly, tax-free payments from the lender. This mortgage is a bad idea because you are putting a paid-for home at risk, and the fees are horrible. In fact, the FTC claims that reverse mortgages have the most fraud in the mortgage business.

Accelerated/Bi-Weekly Payoff

The idea is to make a half-payment every two weeks, which comes out to 13 payments a year. You're paying off your home early by making an extra payment each year. Now, this is a good idea, but it's a bad mortgage option. There's no need to pay your lender a fee in order to make the extra payment. You can easily pay extra on your own without having the fee tacked on.

Tax Advantage

Technically this isn't a mortgage option, but many people hang on to their mortgage instead of paying it off early; they're convinced they will get a tax advantage. If you're keeping your mortgage in order to get a tax cut, that's just dumb. Don't fall for that myth; the math just doesn't add up.

Get connected now with a real estate agent in your area that Dave endorses.

Top Articles

How to Make the Best Homebuying Decisions

Home Selling 101

The Truth About Mortgages

More About: Real Estate | Mortgage

Post a Comment

by Anna at February 07 2010 10:03 PM

We are getting ready to purchase our first home in May. A real estate loan agent recently told me that no bank will loan us money if we ask that they not sell the debt to a third party. He also told me that the interest rate will change based on the market. I thought that if I bought a home with a fixed interest rate that it would stay at that rate. Thanks, :)

by Lynne at February 02 2010 11:42 AM

I just saw a segment on FOX about Jordan Goodman's HELOC instead of 30 yr fixed mortage to pay for house in 5-7 yrs. Is this too good to be true?

by Chris at December 15 2009 10:27 PM

I agree %100 with Joshua Townsend. The key is knowing what you can manage under any circumstances, which is not limited to and including unemployment. As long as you can pay your annual debts and expenses without crashing below the negative margin you’re ahead of the majority. Foreclosure should be something that brings these thoughts to a serious discussion. I suggest having mandatory meetings one a week/month to discuss savings on cost of products, consolidating weekly spending habits, and reducing the overall amount of funds consumed by weekly expenses. If you save every week, the revenue generated annually can eliminate debt (Home Mortgage) faster. Discipline is key here!! =)

by Joshua Townsend at December 10 2009 12:18 PM

Personally, I would much rather lock in a fixed rate of 4.5% for the next 15 years than a 3% rate for the next 5 years and God only knows what rate for the last 10. Sure, ARMs are great if you're going to sell your house or pay it off early, but as we've seen with the recent mortgage crisis and economic recession, are you sure you can really sell that house or pay it off in time?

by Scott at November 22 2009 8:30 PM

I disagree with the ARM comments. Most have a fixed period of 3,5,7 years then an adjustment every year after that. A lot of the riskier interest only ones have gone away(I think) I went into an ARM at 4.5% 5 years ago that just adjusted to 2.875%. The plan is to ride it a little longer then lock into a 15 fixed or renew with a 7/1 ARM. The key is being disciplined and do what Dave suggests in paying your mortgage off early. If you are just getting a mortgage the 15 is the way to go, rates won't stay this low for ever.

by jeff vogel at November 17 2009 6:55 PM

I am 66years old and have a mortgage at 5.85fixed.Bank Of America has been trying to get me to refinance to lower the payments,but I feel this is a bad idea. We are working on your program to get out of debt but don't see how we will be able to pay off our mortgage at our ages.