Question

Which kind of mortgage do you think has the most risk of getting a household into financial trouble? Why?

Answer 1

Interest-Only ARMs : it is one of the most risky mortagage option which mihgt create a financial problem to a household member.

With some interest-only loans, called interest-only ARMs, the interest rate is not fixed, but can go up or down based on market interest rates. Essentially, the interest-only ARM takes two potentially risky mortgage types and combines them into a single product.

Here's an example of how this product can work. The borrower pays interest only, at a fixed rate, for the first five years. Then, for the next five years, the borrower continues to pay interest only, but the interest rate adjusts annually based on market interest rates, meaning that the borrower's interest rate can either go up or down. Then, for the remainder of the loan term, say, 20 years, the borrower will repay a fixed amount of principal each month plus interest each month at an interest rate that changes annually.

Many people simply do not have the financial or emotional wherewithal to withstand the uncertainty that comes with interest-only ARMs