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Friday, November 05, 2004
The Best Ways to Pick a Mortgage Source: Charleston Gazette, The Publication date: 2004-11-05 Types of mortgages * ARMs, or adjustable rate mortgages, come in a variety of permutations. Some adjust annually, and others adjust every three or five years. * Fixed-rate mortgages have an interest rate that is locked in for the length of the mortgage and never changes. * Hybrid loans carry a fixed interest rate for several years and then adjust. * Two-step balloon loans are for consumers who know they are going to be relocated in a specific period of time. The mortgages carry a low interest rate for three, five, seven or 10 years and then the full balance is due. * Interest-only loans that before the Great Depression were the standard form of home mortgages made a comeback about three years ago, and now are available in many versions. Down payment options: Homebuyers can choose from loans with 0 percent down, gift programs that provide a down payment and variations on the traditional 20 percent down. Homebuyers can pick from 15-, 20- and 30-year loans. Some local lenders even offer a 40-year mortgage, although it is rarely used. Fixed-rate, 40-year mortgages are being tested elsewhere in the country by a partnership between 16 credit unions and mortgage giant Fannie Mae, which next year will decide whether to roll out the loans on a broad scale. There also are the federal and state programs for first-time homebuyers, veterans and low-income buyers. For anyone who does not qualify because of poor credit, there is also the subprime or nonprime mortgage with higher interest rates. Here are the advantages and disadvantages of some home mortgages: * 15-year fixed: Advantages: Shorter term. Home owned in half the time of conventional loan. Total interest can be lower than a 30-year fixed mortgage. Disadvantages: Bigger monthly payment. Qualifying is tougher because of higher income requirement. * Adjustable-rate mortgages: Advantages: Initial lower payments. Initial rate usually 2 percent to 3 percent lower than conventional loan. Makes buying more affordable. Payment drops if interest rates drop. Disadvantages: Payments go up if rates go up. Requires budget discipline to anticipate interest rate movements. * Hybrid loans: Advantages: All the advantages of an adjustable rate. Lower rate can be fixed for a varying number of years, say one, three, five or seven. Usually the shorter the fixed time, the lower the rate. Eventually converts to a fixed rate. If housing prices rise, you can sell and trade up before the conversion kicks in. Disadvantages: If you do not convert, it is just a regular ARM. You might want to avoid this if you plan to own the home for a long time and anticipate interest rates rising. * Interest only: Advantages: Can get a bigger loan and more house. Typically used by home buyers who receive the bulk of their income in bonuses. Good if you expect quick increase in income to pay down principal. Good if you plan to move before principal is due. Disadvantages: Need budgeting skills. Need cash for lump sum payments. Must refinance at end of interest payment period. Does not build equity unless the home appreciates. * Low down, no document loan: Advantages: Helps if you have trouble verifying income. Lender does not require proof of income and assets. No debt-to-income ratio used. Disadvantages: Higher interest rate because of higher risk. Bigger down payment. Higher credit standards. * Two-step balloon loan: Advantages: Good choice if you do not expect to own home past date when the balloon payment is due. Payments are usually lower than conventional fixed loans. Lower interest rate than long-term loan. Disadvantages: At the end of a few years, you must sell or refinance because all remaining principal is due. Rates may be higher. May end up owing remaining principal plus additional settlement costs if the house does not appreciate. * Piggyback or split loans: Advantages: Can avoid paying private mortgage insurance (PMI) when the down payment or equity in your home is less than 20 percent of the value. Mortgage payment generally is lower. May be used with most fixed rate and adjustable rate loans. Disadvantages: Higher interest rate on second mortgage. Slightly higher cost since there are two loan closings. Sources: Mortgage Bankers Association www.mbaa.org/ Goodmortgage at www.goodmortgage.com. |
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