6 Common Mortgages
and Who They Fit
- 1. Conventional 30-year, fixed-rate mortgages
Pluses: Good
for buyers who want the security of a fixed principal and interest payment and
plan to stay in a home long-term.
Minuses: Higher
overall interest than 15-year loans. May need to refinance if rates fall significantly.
- 2. Conventional 15-year, fixed rate mortgages
Pluses: Appeals
to buyers who can afford higher payments and want to build equity quickly and
pay less interest across a loan's life. Payments remain the same over the life
of the loan.
Minuses: Payments
25 to 30 percent higher can be a burden if income changes.
- 3. Bi-weekly mortgages
Pluses: Good
for buyers who want to reduce the time needed to pay off a loan. By paying half
the monthly payments every two weeks, the approach produces 13 monthly payments,
rather than 12, per year.
Minuses: Little
flexibility if income changes or emergencies arise.
- 4. Adjustable-rate mortgages
Pluses: Low
interest in the first year. Good for those who know their income will rise over
the coming years or those who are moving in a couple years and aren't concerned
with a rate hike. Allows borrowers to qualify for a higher loan amount.
Minuses: Monthly
payments can increase significantly if rates rise, although most adjustables
have some form of interest-rate cap.
- 5. Multi-year fixed, with balloon
Pluses: Lower
closing costs than fixed mortgages; low payments.
Minuses: Need
to refinance at end at end of fixed-rate period, no matter what interest rates
are.
- 6. FHA and VA
Pluses: Lower
down payment requirements than conventional loans. Often easier to qualify
for for those with low incomes.
Minuses: Requires
additional inspections and insurance.
In case of VA loans, limited to veterans.
TIP: Conventional wisdom says lock in
a rate right away. But in a volatile market, rates could come down. Advise buyers
to talk with the lenders and consider their advice about when to lock.
TIP: Some states prohibit real estate
professionals from receiving referral fees for assisting lenders in loan origination.
Other states require real estate practitioners to be licensed as mortgage brokers
to receive this type of compensation. HUD has also issued a statement that individuals
must do significantly more than just direct a borrower to a particular lender
to earn a referral fee.
Understanding
FHA Loans
