Which Mortgage Loan Program Is Right For You?
Fixed Rate Mortgages - Are you in search of stability? Is the home you are considering purchasing your dream home? One you plan on living in for the next 15, 20, 25 years? If you answered yes to any of these questions, you may want to consider a fixed rate mortgage. There are a number of different fixed rate loans; 15 year, 30 year fixed rate or even a newer 40 year loan term. It's not a bad idea to think of these types of loans as an insurance policy; regardless of what happens to interest rates, your loan rate stays the same. This is the most common type of mortgage. The downside here is that when rates go lower, your rate stays the same.
Bottom Line: If you like stability over the long term, the fixed rate mortgage loan is a good option.
Adjustable Rate Mortgages (ARMs) - This type of mortgage began quite popular in the 80s because it offers borrowers an initially low interest rate (essentially locked in at this low rate for 3, 5 or 7 years). After this initial period, the mortgage rate adjusts according to an specific index. During times when fixed rates are relatively low, adjustable rate mortgages are less attractive to borrowers. Some borrowers may be confused by the 3/1, 5/1, 7/1 or 10/1 numbers that define the specific adjustable rate mortgage. The first number tells you how long (how many years) the interest rate is fixed. The second number tells you how often the rate can adjust once the initial rate period is over. So, if you took out a 7/1 option arm loan, the rate would be fixed for 7 years and then would adjust each year after that. The amount that the interest rate would adjust each year is capped and is set by the lending institution -- your lender should clearly point out the percentage rate cap before you take out the loan. In nearly all cases, a borrower would want to refinance their loan before the end of the fixed rate period in order to avoid the rising rate adjustment.
Bottom Line: If you don't expect to be in a home for more than 5 or 7 years and want a lower initial interest rate, an adjustable rate home loan is a good option.
Interest Only Mortgages - This type of mortgage is pretty self-explanatory; borrowers pay only the interest portion of their mortgage; they do not pay any of the principal or original loan amount. This is ideal for borrowers who are trying to get into their first home and who believe that the value of the home will increase over the life of the loan. It is also ideal for people who have commission based jobs where they don't make as much monthly, but make money at less frequent intervals. With most interest only mortgages, the borrowers pay interest only for the first, say, 10 years. After this period, you then begin paying both interest and principal.
Bottom Line: Interest only mortgages are good starter loans, especially in good real estate markets.
Balloon Mortgages - This type of mortgage is fairly similar to an adjustable rate mortgage in that the borrower has a low initial interest rate period (usually 5 or 7 years). At the end of this period, the mortgage then ends and the borrower must either pay off the remainder on the loan with a "balloon" payment or reset the loan at current market rates. Because the payment schedule is amortized over 30 years with interest rates that are typically lower than a fixed rate mortgage. Once the rate is reset, it can increase dramatically over the next few years so most borrowers refi into a more attractive loan structure.
Bottom Line: If you are looking for a short term loan -- less than 7 years, a balloon mortgage may be an option worth looking at.
Low Doc and No Doc Mortgages - These types of mortgages carry a higher interest rate but require much less financial verification by the lender. These loans are ideal for borrowers who make enough for the mortgage but don't necessarily look attractive on paper (think self-employed individuals) or those with poor credit histories. Lenders will usually require only your credit score, income and any assets you may have. No doc or low doc mortgages may be 0.5 to 1.5 interest rate points higher than a normal loan.
Bottom Line: If you look less than stellar on paper, but know that you can carry the mortgage that you and your broker discuss, a no doc or low doc mortgage may be an option to get into a loan.
