Buy Lines: A Closer Look At Mortgage Options For Buying Or Refinancing A Home

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By Mia Bolaris-Forget

In the market for a home or the opportunity to refinance? Experts say there are more choices now than ever before, including the option of paying off the interest and postponing paying off the principal for several years.

Financial experts however note that although this “enviable” option is available, the traditionally standard fixed rate 30-year mortgage is still the favored choice. They state that about two thirds of today’s mortgage loans fall into the fixed rate category and that most have a 30 year term.

Yet, the lingo and the logistics can prove quite perplexing; especially to first time homeowners, and (some) newlyweds. Professionals point out the basics, to make the basics easier to understand.

30-Year Fixed-Rate:
This mortgage has remained favored over the generations. It’s most likely the one your grandparents, and parents had, and with it’s good rate and locked in low payment, most figure it’s still the way to go.

· Pros: Confidence and Safety. Interest rates remain unaffected by inflation, which means monthly payment does too. If interest rates go down, you always have the option of refinancing and taking advantage of the lower rate.

· Cons: Thirty years, means long-term debt. According to experts, the average length of stay at a house is approximately a decade. They suggest considering a higher risk loan with lower payments if you anticipate selling in the near future and are confident that your home’s value will increase.

15-Year Fixed Rate:
The second most popular mortgage selection, mostly among those who choose to refinance. According to industry officials, more mature populations, those closer to retirement opt for this option.

· Pros: The opportunity to own your home in half the time, while still taking advantage of lower rates.

· Cons: Potentially high payments, especially in comparison to ARMs.

ARMs:
Rates number three among the top three most popular mortgage loans. ARM stands for Adjustable Rate Mortgage and offers house hunters a variety of options. The rate however is based on changes of a designated index such as the U.S. Treasury Treasury_Bill Index.

Some Adjustables start out with fluctuating rates. Others, known as hybrids begin with a fixed rate and then become adjustable with an interest rate that is subject to annual change and fluctuation.

According to experts, the most desirable ARM is the 5-1 ARM with a fixed-interest rate for five years, followed by an adjustable rate. Other popular hybrid ARMS include the 3-1, 7-1, and 10-1.

Interest-Only ARMs:
With a generation with more debt and a higher cost of living than any other, most simply can’t make ends meet based on income vs. cost of living. So, interest only loans have become the latest financial craze and rage. In higher priced markets, this is an ideal way to homebuyers to be able to secure and “afford” a home.

Interest-Only ARMs have gained in popularity over the past few years and allow homebuyers to make payments initially on the interest only, deferring payment on the principal for later on. When the initial term however comes to an end, monthly payment increases considerably.

· Pros: ,/b> Gives homebuyers the leverage to obtain a home in an exclusive area for a small monthly investment. This allows buyers to reap the benefits of saving while maintaining low monthly installments. It also offers owners of such property to sell (at a profit) or refinance prior to the time when they have to start making payment on principal. These loans are attractive to buyers who anticipate an increase in earning power by the time the loan matures and interest rates rise, savvy and disciplined investors and those who want to front-load their 401(k)s.

· Cons: The built in risks related to all ARMs, as well as the fact that borrowers fail to build equity during the interest-only phase. Additionally, borrowers may be subject to pride drops that could potentially lead to increased payments with no equity and property with diminished value. In the worst-case scenario, borrowers may be faced with a higher loan than the value of their home.


Option ARM:
Also referred to as the flexible-payment ARM, this load is also increasing in popularity as it offers diverse payment options each month. Among these: a minimum payment, an interest-only payment, or a payment based on a 15 or 30 fully amortized mortgage.

· Pros: Beneficially initial low rates. Furthermore experts laud this loan’s flexibility as they note the potential for choosing a lower payment during tough times, such as holiday season. Additionally, borrowers are allowed to pay off the loan early via consistently choosing the 15-year payment (plan).

· Cons: These loans can be quite complicated. Before choosing this option experts emphasize that borrowers fully understand the terms and conditions. The risk varies with the payment option selected. The interest-only payment has the same risk as the previously mentioned interest-only loan, and the minimum payment is even riskier. Also, because these loans have variable monthly interest rates, the payment amount is altered yearly, and borrowers face the risk of choosing a lower payment that fails to cover the interest. The difference is then added back to the loan, often putting the borrower deeper in debt (known as negative amortization). And, large increases are a possibility, larger than with traditional ARMs.

Other Types Of Mortgage Loans:
Besides the basics other types of home loans are available (though rare), according to experts. Among these, the forty-year fixed-rate mortgage. These loans are considered balloon loans in which payments are based on a 30-year mortgage, but with the remaining balance maturing in five or 10 years.