What Mortgage is Right for Me?
The conventional 30-year fixed loan may not be for you. Consider and compare all the options.
By FrontDoor.com |
Published: 11/01/2007
Other loans to consider if you can take risks:
- Interest-only mortgages also let you keep more cash. They do not require principal payments during an initial period, typically three, five or 10 years. After the initial period, borrowers must begin repaying principal over the remaining life of the loan. By comparison, a traditional amortizing loan requires principal and interest payments from day one, with more of the monthly payment going to interest in the early years and to principal in the later years.
Homeowners can lower their monthly payment by 20 percent to 25 percent by skipping principal payments in the early years, but they must be prepared for a big jump in payments when the interest-only period ends. A lower initial monthly payment may also allow you to qualify for a bigger home loan. The downside? When housing prices fall, you could end up owing more on your home than it's worth.
To qualify, you normally must have good credit or pay a slightly higher fee or interest rate.
- Balloon payment mortgages are short-term, fixed rate loans which involve small payments for a certain time period and then one large payment (the balloon payment) for the remainder of the loan.
- If the home you want appraises for more than the sale price, you may be able to borrow up to that appraised value to cover closing costs.
If you don't like debt and risk, you may want to stick with conventional loans with fixed rates and shorter terms, making big down payments and extra principal payments whenever possible. If you go with a 30-year mortgage, you could refinance after 10 years. You could get a lower rate and dramatically reduce your principal balance in a shorter period.
Here are more tips for finding the right home loan:
- Use mortgage calculators and other tools that let you see exactly how much you'll have to pay under various scenarios.
- Shop for the best rates from both local banks and national lenders. Consider working with a mortgage broker.
- Decide if you're willing to pay for points to get a lower interest rate, or take a higher rate to keep closing costs down.
- Combine different loan features to create a loan that's comfortable for you.
- Factor in costs like property taxes, insurance and homeowner's association fees. Will your lender hold these in escrow?
- Ask about alternative loan terms, such as 20 years. They exist though many lenders don't advertise them.
- Consider refinancing your current home if you need cash for a second home.
- Download this helpful guide courtesy of Freddie Mac.
- Fill out Fannie Mae's Uniform Residential Loan Application and give to all your potential lenders.
(Information from Scripps Howard News Service was used in this article.)
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