Main Mortgage Risks

Mortgage is among the biggest financial commitments an average individual can make in their lifetime. Given the sum being borrowed and the length of time spent paying it back, signing a mortgage contract is anything but risk-free.

The following is a list of some of the most common risks that come with a mortgage.

Mortgage Contracts Can Be Confusing

Like all legal documents, mortgage agreements are complicated enough to make your head spin. Before signing on the dotted line, it’s vital that you understand not just the commitment you are making but also if it’s the right one for you. You must be certain that the terms and conditions of the contract are within your means to comply with. Don’t just take a leap of faith—actually read every bit of information provided and ask questions if something, no matter how trivial, is not understood. Solicit outside legal help if you’re not 100% certain about what you are doing.

Interest Rates Have a Tendency to Change

After a short “fixed rate” interval, which normally lasts 2 to 5 years, the interest rate of your loan will become subject to change. Typically, the fixed rate is followed by your mortgage provider’s SVR (standard variable rate). The latter is generally the higher of the two, so unless you plan to remortgage, expect a payment hike.

The Curse of Negative Equity

Investing in residential property is a popular practice for a reason—it often yields good returns. The risk, however, is that at a time of recession, the value of your property can plummet. This can result in the loss of equity, and your mortgage obligation can eventually surpass your property in value.

For instance, if the economy slumps and real estate values fall by 20%, a property purchased for $100,000 with a 90% mortgage will become worth only $80,000 with a debt of $90,000 on top. In such a scenario, you would be left with equity of -$10,000. The worst part about negative equity is that it will scare off other lenders, and remortgaging will become all but impossible.

Hidden Fees and Penalties

Mortgage companies like to highlight the savings they offer to prospective clients while downplaying the fees. This is the time to exercise wise judgment. If the offer seems too good to be true, it might be a good idea to look for a deal elsewhere. Surprisingly attractive mortgage plans can culminate in costs that exceed the advertised savings. When in doubt, get a second opinion from an independent consultant.

Defaulting on Mortgage Payments

One thing to always remember when signing a mortgage contract is that the lender will have the upper hand for the duration of the deal. Should you default on your payments, your lender won’t hesitate to penalize you. Worst case scenario, of course, is the foreclosure of your property. If you’re falling behind on payments, consider procuring a timely payday loan on Payday Depot and avoid foreclosure. 

It’s imperative, therefore, that before shopping for a mortgage, you ask yourself what kind of monthly payments you can handle without hindering the lifestyle you expect to lead. Make sure to consider your present-day financial security AND the effects a long-term mortgage might have on it.

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