Your mortgage may actually be more riskier than you realize, according to a new study from the University of Michigan’s Bloomberg Finance.
The study examined a sample of 1,000 borrowers who took out a $150,000 loan to buy a boat and were then offered a similar loan with a 30 percent interest rate.
“Our findings indicate that the initial loan is a more attractive and risky investment than initially believed,” the study concluded.
“Specifically, the initial offer of the lower interest rate significantly outperformed the lower loan rate over the five-year term.”
The researchers concluded that, because interest rates are higher when a loan is offered as a lump sum, borrowers will pay more for the loan in the long run, resulting in higher borrowing costs.
But in the end, the researchers concluded, “We believe the initial interest rate is still attractive for borrowers with modest incomes who would prefer a longer term of repayment.”
Bloomberg’s research found that borrowers with low incomes and credit scores who were offered the lowest interest rate were more likely to take out the loan and default.
“The findings suggest that even if interest rates rise as the cost of living rises, borrowers who are more financially secure will still take out a lower-interest loan,” the authors said.
But they also warned that, “this finding could have important implications for policymakers, lenders, and consumers as they consider the potential negative impacts of rising interest rates on their personal finances.”
And if you’re looking to save on your mortgage, the research found the best bet is to refinance your loan.
“Refinancing offers the lowest rate possible, while lowering the cost for the consumer, while also providing borrowers with more income to invest,” the report concluded.
The report is not the first to note that a mortgage isn’t as risky as many people think.
According to the Federal Reserve, the average interest rate on mortgages is about 3.5 percent, with some banks offering an even lower rate.
In addition, many lenders are lowering rates to help borrowers with lower incomes and debt.
The Mortgage Bankers Association says that the average loan is typically a “10 to 20 percent down payment,” with many offering a 30-year mortgage.
In contrast, the median home loan is around $250,000, and the average mortgage interest rate in the United States is 4.8 percent.