Understanding the Risks of Specialty Lending Programs

1. Payment Shock - One major risk is that your monthly payment may increase by a large amount, resulting in "payment shock." Even a change of 1% or 2% in interest rates can result in a very big jump in your monthly mortgage payment. For example, if the interest rate on your mortgage changes from 4% to 6%, your monthly payment could rise by as much as 50% (from $1,000 to $1,500). If your income has not increased enough, you may not be able to afford the new larger monthly mortgage payment. And if that happens, you could lose your home.
Example: How Payment Shock Can Occur
Assume you buy a home for $300,000, put 10% down, and choose a 5.75% interest-only adjustable rate mortgage. The mortgage requires interest-only payments for 5 years. After that, the interest adjusts every year based on rates in effect at that point.

    * Initial monthly payment: $1,294.
    * Monthly payment after 5 years with no increase in mortgage interest rates (amount increases because payments begin to include principal in addition to interest): $1,699.
    * Monthly payment after 5 years with a 3% increase in interest rate to 8.75%: $2,220.

2. Higher Debt Over Time - Another risk that comes with specialty mortgages involves your "equity"-the amount your house is worth after you subtract the amount you still owe to the lender. Consumers who choose some types of specialty mortgages will build equity in their home much more slowly than with traditional loans. In fact, with some specialty mortgages, the amount you owe on your home could increase rather than decrease over time.