Loans to Avoid Downside to Borrowing

There are times in everyone’s life when you need money for various reasons, such as to buy a car or a home, to take a holiday, to pay off outstanding debts or to make improvements in your home. When you take the time to carefully research the numerous loan products available, on the surface some of them may be more enticing than others. However, you have to carefully read the fine print to make sure that this loan is the one that is right for you at this time in your life.

Some of the loan products that will be available and to which you should give some second thoughts to choosing include:

1. Non-conforming loans. If you are unable to meet the eligibility requirements for a traditional mortgage because you have a poor credit rating or you are unable to supply the lender with adequate documentation, the lender may offer you a non-conforming loan. The interest rates you will have to pay on your unpaid balance is quite high with this loan, which means you will need to take it out for a longer period of time and pay a lot more in financing charges. If you do opt for this type of loan, make sure you read all the fine print and ensure you have the income needed to make the monthly payments.

2. Low down payment or no-down payment mortgages. While these types of loans do offer first time homebuyers the opportunity to own their own home before they are able to save up enough money for a down payment, they do carry extra fees. For one thing because you are not making a down payment and the usual insurance on a mortgage is on the amount that assumes you make a down payment of up to 20%, you will have extra costs in an insurance policy on the amount of down payment you should have made. You should weigh the options of the cost difference in the annual premium you would pay for this insurance and the amount of interest you would have to pay with a different loan that has higher interest rates.

3. Long-term mortgage. With the rising prices of homes, many lenders are offering longer terms in mortgages often as high as 40 years. Even though you will have a lower monthly payment for the mortgage, think about how long it will take you to repay the loan. You may not even be alive by this time leaving the debt to your estate unless you have such insurance on the balance owing. During this length of time, you will also have to make many repairs and improvements to the home, for which you will also need money.

4. Wrap loans. If you are unable to qualify for a traditional mortgage, the owner of the property may offer to finance the loan for you in a wrap loan. One thing you should know about this type of loan is that the interest rate is usually about 2.5 % higher than the normal interest rate because the owner wants to make money off the loan as well as the lender.