Worst. Mortgage. Ever.

With all the various types of mortgages out there, have you ever wondered what the most dreadful option would consist of? Greg McBride of Bankrate.com did, and has developed a fictional mortgage that encompasses the worst traits of all existing loans.

His creation: A payment skipping / minimum-payment-option-enabled, interest-only, negatively amortizing, no documentation, prepayment-penalizing, 3-month LIBOR 40-year adjustable-rate mortgage with no down payment and a balloon.

While the above loan he devised does not actually exist, and McBride’s experiment was mostly in jest, his findings illustrate a number of potentially negative components of certain mortgages that are commonplace today.

After all, this made-up loan would contain many elements that appeal to borrowers sucked in by promises of immediate affordability. With the common adjustable-rate mortgages of today, borrowers can choose an interest-only payment or even a minimum-payment option. What we see as a result are borrowers lured by the minimum payment, what leads to a loan balance that GROWS - rather than drops - through the initial years of the loan. This is known as negative amortization.

The only thing worse than making low, interest-only payments would be not making a payment at all, and yet the option of skipping a payment or two each year actually appeals to legions of borrowers ever year. They are either unaware of, or too blinded by the initial deal to see the drawback — that lower the initial mortgage rates, the quicker the rate begins to adjust upward. According to the Mortgage Bankers Association, more than half of ARMs originated in 2004 face the first rate adjustment within three years. As applied to McBride’s fictitious mortgage, the rate would adjust monthly and be tied to the three-month LIBOR index — meaning that rising rates impact the borrower immediately.

• While you’re at it, you might as well lower the initial shock — and increase the overall debt — by making this loan a 40-year mortgage instead of the standard 30.
• And, as long as we are talking worst case scenario, let’s throw in a number of stipulations that make loans more profitable for the lender: prepayment penalties, balloon payments, and no documentation loan options.

Sure, a survey by the University of North Carolina found that prepayment penalties increase the risk of foreclosure by 20 percent, and balloon payments increases the same odds by 46 percent, but both are hardly rare in today’s market. So is this faux loan so big of a stretch?

Not at all. Each awful aspect exists on other loans currently being offered, with the current mortgage lending trend being to “appealing to borrowers with unique cash needs,” despite the risk that such variables entail to the applicant. Think about it. A borrower with unverifiable income, poor credit, no savings and a tight budget can buy a ridiculously expensive home. If that’s not the American dream, I don’t know what is.

In reality, the loans are rarely as ideal as they seem, and will very possibly give way to the reality of a budget-busting financial commitment and a downward financial spiral. Instead of counting on the best-case scenario of low rates, miniscule payments, the recent real estate boom and subsequent price appreciation (which now appears to have peaked), it pays to be cautious and opt for something slightly more secure. Or a lot more secure.