Mortgages are a mainstay of home ownership. A mortgage enables a home buyer to increase his standard of living today based on his expected future income. The loan is paid back in monthly installments, and interest is charged on the loan balance until it is paid off. However, if the mortgagee is unable to pay the installments, the bank might force him to liquidate the property at a price below the its market value. A number of risks are associated with mortgages, from the view point of a consumer.

Uncertainty of Expected Future Income

Your future earnings are uncertain. During the term of the mortgage, you may find yourself unable to make payments and at risk of defaulting on the loan. Once you've lived in your own home, it can be difficult to reduce your standard of living by moving into an apartment. Rather than risk this, some people prefer to rent until their income rises and they can pay cash for a home.

Fixed Rate Mortgage Payments

Mortgages are long-term loans, and many have fixed interest rates. During the term of the mortgage, interest rates will fluctuate up and down. If prevailing interest rates decrease, the borrower still has to pay the higher rate in the mortgage contract.

Mortgage Refinancing

If market interest rates decrease, the borrower can refinance the loan at a lower rate. This implies that the mortgagee is protected if the interest rates decline considerably. This can be problematic; refinancing a mortgage is costly as it involves legal and transfer fees and the interest rates might decrease further resulting in the mortgagee to think that he should have waited for a bit longer before refinancing the mortgage.

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