Loans with prepayment penalties or balloon payments

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Studies have shown that people who refinance their homes with loans containing balloon payments are more likely to end up in foreclosure.

Balloon payments are often found in mortgages carried by people with poor credit. These "subprime" mortgages have higher rates, and thus, higher foreclosure rates than conventional mortgages.

Mortgages with balloon payments are 46 percent more likely to go into foreclosure than loans without balloon payment provisions.

The problem with balloon payments is they punish borrowers if they don't refinance (borrowers must pay the loan in full in a lump-sum in a given period of time). A very poor provision to have in your mortgage.

This types of loans, although perfectly legal, prey on unsuspecting na´ve people. As bad as they are - they are costly, applied unfairly, result in a higher than normal foreclosure rate - they don't even give the borrower a break in the interest rate. People get hooked into these loans because the lender will often offer lower mortgage fees.

If you have less than excellent credit, you would be much better served by getting your credit situation in order than in taking on one of these bad loans.