Mortgage Options
What is best for you?

There are almost two hundred different mortgage options available, but once you examine them you will quickly realize that there are only really six or seven basic types. It’s just that in today’s personalized banking world, lenders try to offer products that are tailored to a client’s specific financial concerns or needs. Choosing the right mortgage depends on several different factors, including your current monthly income, your future expected income, current assets, and liabilities.

Other factors might include whether you intend to pay points up front, or over the life of the loan? Are you interested in an adjustable rate or more comfortable with a fixed rate? What is the time frame you intend to live in the home – if it’s only 3 to 5 years you might want to consider a 5/25 or 7/23 mortgage.

The oldest and most popular variety, a fixed-rate is constant through the life of the loan, and can be taken out in 10, 15, 20, and the most popular 30-year lengths.

ARM loans have interest rates that fluctuate and are linked to one-year Treasury bills or another specific index. The initial rate is low, but grows each year. There is usually an initial yearly cap of two points, and also a lifetime ceiling cap of approximately six points. The rate can also drop.

These types of loans are normally available in two varieties: convertible (which converts the loan to a fixed loan for the remaining 25 or 23 years) and nonconvertible (which converts the loan to an ARM). Both are 30-year loans with fixed interest rates for the first 5 or 7 years, then change to convertible or nonconvertible loans for the remainder. Both loans can be amortized over the 30 years. They’re considered riskier than fixed-rates, but less risky than ARMs during the first 5 or 7 years.

A two-step mortgage is an attractive option for borrowers in certain situations. The classic consumers for a two-step loan are borrowers who want to enjoy a lower-than-market interest rate and lower monthly payment over the first several years of the loan. Other familiar two-step borrowers are homeowners who expect to sell the home before the initial period expires. Also, buyers who believe that interest rates will fall during the loan’s initial rate period are likely candidates for a two-step loan.

FHA loans incorporate pre-set spending limits. The amounts are set by the median prices of different cities within a particular area. FHA loans can be obtained with only a 5% down payment and in some cases only 3%. However, a steep mortgage insurance premium and other upfront costs are required.

VA loans are designed to help military veterans purchase homes with no down payment. Also, veterans aren’t allowed to pay points, although they are responsible for some fees. This peculiarity is sometimes a problem for sellers in that they are requested to fund this expense.

These types of loans can be any length. In some cases you pay principal and interest and in others only interest. In any case, the loan must be paid in full when it’s due in one of two ways: amortized over 30 or 50 years, and you pay the first 5 or 10 years before paying it off or refinancing; or you only pay the interest until the loan is due.

Originally designed for first-time buyers a GPM mortgage allowed for reduced payments in the early years of the loan. Recently these types of loans have been phased out in favor of 5/25s and 7/23s (which are simpler to package).

GPMs are self-amortizing loans meaning you’ll completely pay off the debt at the end of the loan term. They are typically an FHA product (sometimes referred to as a Section 245 loan), which require the borrower to pay upfront and annual mortgage insurance premiums.

In this type of loan arrangement the lender offers a below-market rate in exchange for a share of the profits when the home is sold. You get all the tax benefits, and the lender doesn’t make money unless you do. On the other hand, if your home increases greatly in value, you could lose a lot of that profit to the lender. These types of mortgages are most common among first-time buyers working with non-profit groups that help low to moderate income families.

As the name implies, payments are made twice per months for a total of 26 per years (rather than 12 times or monthly). This reduces the amount of interest being paid over the life of the loan.

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