Lend an Ear and Let's Talk About Home Loan Options
Has it ever been easier to get money to buy a house ... and
yet more confounding? Television commercials want you to
believe that lenders will compete for your business. You can’t
surf the Internet without being assaulted with pop-up windows
hawking low-interest mortgages. And online search engines
promise to find you just the right loan for your needs.
Surely, today’s homebuyers have more financing options
than ever before. The good news is that you can tailor
financing to fit your needs. The bad news is that being
confronted with an alphabet soup of options can be
confusing.
So what loan is right for you? That depends on several
factors. For example, what is your current economic situation,
your realistic financial outlook, and how long you plan to stay
in your new home?
If you plan to live in your new home for a very long time, you’ll
probably be most interested in a fixed-rate mortgage.
Perhaps the easiest type of loan to budget for, fixed-rate
loans carry the same interest rate throughout the life of the
loan. Changes in property taxes and insurance escrow
notwithstanding, your monthly payments will remain the same
month to month, year to year.
Adjustable-rate mortgages, on the other hand, vary
according to market indexes. For example, some rates are
tied to factors such as T-bills or the Prime Rate. Often, the
actual rate you are first charged is lower than the current
fixed-rate options. But beware, the rate can change every
year. It may go up. It may even go down. To protect
homeowners from dramatic surges in interest rates, most
adjustable-rate plans cap increases at 2 percent each year.
That may sound honky-dory when you’re mooning over and
signing for your dream house. But consider this, for a
$200,000 mortgage, the difference between a 6 percent rate
and an 8 percent rate is nearly $270 a month. If your interest
rate increases the limit, could you handle the extra monthly
burden? With such uncertainty about the future, adjustable-
rate mortgages are more suited for homebuyers who plan to
re-sell in only a few years.
Some lenders may offer loans that feature both a fixed rate
and an adjustable rate. These hybrid loans may start with a
fixed rate for a set period of time -- usually seven to 10 years
-- and then convert to an adjustable rate. The advantage of
hybrid loans is that homebuyers can generally get a lower
interest rate than traditional fixed-rate mortgage. The big
disadvantage is that after the expiration of the fixed-rate term,
the interest rate can go up as much as 6 percentage points.
Or it may go down. Clearly adjustable-rate mortgages are
attractive to optimistic thinkers, who always assume things
will be better down the road.
The most optimistic thinkers may consider balloon
mortgages. Balloon mortgages are short-term loans that
have lower than normal interest rates but a very large final
payment due at the end of the loan.
A graduated payment mortgage is another “optimistic”
option, which have payments that start out low and gradually
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Lend an Ear and Let's Talk About Home Loan Options
increases -- presumably -- as the homeowner’s financial
situation improves.
These are just a few examples of “conventional loans” offer
by private lenders. As a homebuyer, you may be eligible for a
slew of “unconventional” government loans.
For example the Federal Housing Administration (FHA)
administers various mortgage programs that offer plan with
low-to-no down payments. Strict economic and salary
guidelines apply. VA loans are guaranteed by the U.S.
Department of Veterans Affairs and are available to veterans,
veteran spouses, and certain government employees. The
Rural Housing Service (RHS) guarantees loans for rural
residents with minimal closing costs and no down payment.
Outside the government, other unconventional loans may
include seller-assisted mortgages, in which the seller
underwrites all or part of the loan. Of course, terms can vary
dramatically from one seller to another.
Ask your real estate agent and various lenders about all the
options available to you. Contact at least three lenders and
compare plans. In economic times such as these, it’s
important to do you homework and borrow wisely. Now more
than ever, you want to make sure you find funding that you
can live with. According to the Mortgage Bankers Association
of America, a record level of U.S. mortgage holders lost their
homes to foreclosure in the third quarter of 2002.
Yet, lower interest rates and new-fangled programs remain
nigh on irresistible.
Whatever you do, choose a plan that you can repay!
