By John Campbell
When you’re finally ready to take the plunge into homeownership you should do your homework so you can make an informed decision when choosing the mortgage that’s right for you.
There are several different mortgage options available to you. Whatever mortgage you ultimately decide to go for, the decision should be yours. Don’t let pushy realtors or mortgage brokers push you into a mortgage that you don’t want. You’re the one who should be calling the shots, not them.
Mortgages that may be available to you include:
Traditional Mortgages - These are the most common mortgages available and often present the lowest risk to homeowners. With a traditional mortgage, you typically pay a 20 percent downpayment on your new home and acquire a mortgage to pay off the remaining balance within 15 or 30 years. The interest rate you agree to pay when the price of the loan is locked in will be what you pay at an annual rate throughout the life of the loan.
Mortgage Refinance - If interest rates lower significantly, you can refinance your mortgage to a lower interest rate. As with any mortgage, you’ll have new loan closing costs and other fees that may eat away at the potential cost savings associated with a refi.
80/20 Loan - If you don’t have enough money to pay a 20 percent downpayment on a home, you can opt for an 80/20 loan. With an 80/20 loan, you’re essentially taking out two mortgages; one at 80 percent of the value of the home and one at 20 percent of the value of the home. The 20 percent mortgage will have a bit higher interest rate and may be required to be paid off within 15 years. These are more expensive than traditional mortgages but can be an excellent resource if you can afford the monthly payments but can’t afford the downpayment.
FHA Loans - If you don’t have enough money to pay a 20 percent downpayment on a home, the Federal Housing Administration can provide you with funds if you can at least pay 3 percent down. These loans are more difficult to acquire than a standard mortgage, however, and you’ll also have to pay extra each month for private mortgage insurance (PMI) until you have accumulated 20 percent of equity in your home. There are also caps on the price of homes you can purchase. If the home you want is above whatever the current cap is, you’ll be disqualified for an FHA loan.
VA Loans - An excellent loan resource if you are a veteran or member of the U.S. armed services. With VA loans you may qualify for up to 100 percent of the value of a home, depending on its purchase price, and you won’t have to pay PMI.
Adjustable Rate Mortgage (ARM) - These mortgages may be an excellent resource if you’re an investor or someone planning to stay in your new home for less than 3 or 5 years. The most common ARMs available to consumers are 5/1 ARMs and 3/3 ARMs. With a 5/1 ARM you’ll have the same interest rate for the first 5 years of your loan, followed by annual interest fluctuations. With a 3/3 ARM your interest rate will fluctuate once every 3 years. The interest rates on these loans are typically lower than the standard mortgage rate for the first 3 or 5 years, which could save you a considerable amount of money in the short term.
These loans are riskier than traditional mortgages, however, as the price of the loan could increase significantly when the price resets. ARMS with a capped monthly payment can keep you from paying more than you can afford if interest rates skyrocket. The problem with these types of ARMs is that if the percentage rate rises above your monthly payment cap, any additional interest you owe will get tagged onto your mortgage balance and will have to be repaid eventually
Option ARM - This is a highly flexible mortgage that offers four different monthly payment options available - minimum payment, interest only and a fully amortized payment at either a 15- or 30-year rate. It may be an excellent choice for you if your income is unstable or your budget fluctuates quite often.
Interest Only Loan - With these loans you pay a set interest only amount on a monthly basis. Once the loan term is complete the entire entire loan balance will be due as one large balloon payment or a large chunk of the principal will begin applying to each subsequent loan payment until the mortgage is paid off.
Balloon Mortgage - Often a part of interest only loans. Balloon mortgages often feature very low monthly payments for a set period of time, say 5 - 7 years. Once the time period is up the full amount of the loan is due as one lump sum payment.
Negative Equity Mortgage - These loans are include your mortgage and additional funds to pay other bills or whatever you see fit to use the additional funds for. Every dollar you receive over and above the price of your home is considered negative equity, however. You won’t build any equity in your home until you either pay off the additional loan funds or the value of your home rises above your full mortgage value.
The mortgages mentioned above are just some of the options that may be available to you when you start looking for a mortgage. You need to consider the short-term as well as long-term implications of each loan. Choose wisely or you may be putting your financial well being at risk.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.
