|
What type of loan
is right for me?
Cynthia E. Brodrick
OK, so they're willing to loan you the money. Now
you need to think about how you will pay it off. Sigh. Well, there
are options here. Different loan arrangements will suit different
customers, so you'll want to know your choices.
This one is as basic as it sounds -- and its best
feature is the lack of surprises. The rate of interest remains the
same as it was the day your mortgage was born. It never changes
for the life of the loan (30 years is most common) unless you refinance
and replace it with another loan. This is the most traditional and
conservative mortgage, says Anderson. It's especially good for people
on a fixed income.
Well, obviously, this is the opposite of the fixed
rate. With an ARM, the rate of your mortgage changes with the wind
-- OK, not quite that drastically. A standard ARM adjusts yearly,
but don't panic. There are caps or limits as to how much the rate
on the mortgage can change year to year, and there's a lifetime
cap as to how much it can change overall.
The advantage of this mortgage is that the starting
interest rate is typically lower than that on a fixed-rate loan.
And if you gamble correctly, the rate could go down. Obviously this
type of mortgage is much more popular when rates are high and likely
to drop. Anderson says that in the 1980s, more than 50 percent of
loans were this type as people dreamed of the lower rates that finally
arrived in 1998.
Then there are some hybrid loans out there. They may
at first seem to be fixed-rate loans, but after five or seven
years, they become adjustable rate mortgages. These are called 5/1s
and 7/1s. If you know you won't be in the house for longer than
five or seven years, then you can get into a slightly lower rate
for that time period than if you had just gone with a fixed-rate
loan. Anderson says the purpose of this type of loan is that it
gives some of the security of a fixed-rate mortgage, but at a lower
rate.
A balloon mortgage is a loan that has regular monthly
payments which amortize over a stated term (for example, 30 years)
but call for a final lump sum (balloon payment) at the end of a
specified term, or maturity date, such as 10 years. Other types
of "alternative" mortgages are 7/23 and 5/25 mortgages, which have
a one-time rate adjustment after seven years and five years, respectively.
The downside of these loans is that the payments can potentially
rise like helium. Often, the lender reserves the right to make a
homeowner re-qualify if the lender is not sure the borrower can
pay at the new higher rate.
-- Posted: Aug. 26, 1999
|
