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These days, it can be easy to get a mortgage even for a home that seems financially out of reach. And homeowners can tap home-equity loans to finance everything from a Lexus to a trip to Las Vegas. But this is not such a good thing.
Many loans that mortgage brokers and lenders are pushing increase the odds of foreclosure by allowing borrowers to accept more risk than they can manage, especially if home prices level off or if interest rates increase. That's because some loans, such as interest-only mortgages, keep monthly payments artificially low at first but can skyrocket to unaffordable levels later on.
Widespread defaults haven't occurred because the loans are relatively new, home prices have continued to rise, and interest rates have remained low. But regulators are paying close attention to the rapid growth of nontraditional mortgages, which in states like California and Nevada made up more than half of new mortgages in recent months. In May, banking agencies issued guidelines to rein in the use of some unconventional home-equity loans and may soon do the same for first mortgages. Here are some of the riskiest mortgages, and why we don't recommend them:
Interest-only mortgages. After 3, 5, or 10 years of paying only interest on your loan, monthly payments can jump 25 percent when principal is added to the bill. Because most of these mortgages have adjustable rates, ...