The US economy was at its worst state due to mortgage foreclosures, which coincided with the 2008 financial crisis. Most American borrowers failed to settle their mortgages, and homeowners had experienced difficulty with foreclosures. You may be wondering why, so let this article tackle the common mistakes committed by homeowners.

No Down Payment

Yes, this sounds good yet tricky. During the subprime crisis, several entities offered borrowers no down payment to borrowers. There are two reasons for no down payment feature: it raises the equity amount in the house and reduces the amount of money owed on the property, and it ensures some skin in the game. Those who give a huge down payment are more likely to try everything possible to pay their mortgages as they do not want to lose their investment. In other words, the higher the amount borrowers owe, the higher the possibility they will walk away from the obligation.

Reverse Mortgages

Advertisements make reverse mortgage more appealing by saying this is the ultimate solution to all income-related problems. But the question is, is this the ultimate solution? Reverse mortgage pertains to a loan available to individuals aged 62 and above, which have used the equity out of their house in order to have a steady income stream. The available equity is paid out either in a lump sum or in stable income stream.

But this mortgage has many downfalls. One is high upfront costs: mortgage insurance, appraisal fees, attorney fees, origination fees, and other related fees, which can deplete your equity quickly. Also, the borrower loses the entire ownership of the property. Why? Since the equity is pulled out from the house, the bank now owns it. As a result, the owner’s family is only entitled to any equity left following all of the cash from the deceased’s estate has been used to repay the mortgage, interest, and fees. If the family wants to retain the ownership of the property, they have to work out an agreement with the bank and fulfill the terms agreed by both parties.

Adjustable Rate Mortgages

Considered every homeowner’s dream, ARMs begin with a low interest rate for the first two to five years. It enables homebuyer to purchase a bigger house and give lower payments he or she can afford. The rate will revert to a higher market rate after two to five years. The scheme is actually good because borrowers can simply take the equity out of their houses and refinance to a reduced rate after it resets. But that is not always the case. In most instances, borrowers fail to find ways to refinance their existing loans when housing prices decline. This leaves them facing high payments, which are two or three times higher.

Liar Loans

In 2007, this term prevailed during the real estate boom before the mortgage crisis. It was easier for lenders to hand these out, so the borrowers just accept it without further questions. By the way, liar loans have minimal to no documentation, and do not require verification. The loan looks at the individual’s declared income, assets, and expenditures.

The loan is called such because borrowers can misstate their personal information and financial details for them to acquire a larger property. The real trouble begins when the buyer gets the house. Especially if he has no job or other source of income, he won’t be able to make his mortgage payments, which can lead to bankruptcy and disclosure.

Longer Amortization

Do you think 30 years is the longest time frame you can secure on a mortgage? Do not be mistaken. Some companies offer 40 or 45 years today, allowing people to buy a larger property for lower payments. This make sense for twentysomething individuals who have plans to reside in their home for the following 20 years. The interest rate on a 40-year mortgage will be moderately higher than a 30-year loan. But at the end of the day, do you really want to be giving mortgage payments in your golden years?

Odd Mortgage Products

Unfortunately, many homeowners do not understand the nitty-gritty of homebuying. And the lenders use this to their advantage by coming up with all sorts of exotic products to make owning a home a dream come true. Such products can lower payments by 20% to 30%, letting borrowers live in a house for a few years and set the amount they will pay on their mortgage monthly. This is called name your payments loan.

However, here’s the catch: the principal payment will climb after a particular time period. Called negative amortization products, borrowers are creating negative equity instead of bolstering equity. It escalates the amount owed each month until it cripples their capacity to settle it. Those who fail to settle their exotic mortgage payments have become underwater on their loans.