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LESSON 6: OTHER LOANS (INCLUDING SUBPRIME MORTGAGES)
(continued from previous page)
Balloon mortgages
With these, borrowers get lower rates and payments
for a specific period of time, which usually is anywhere from three
years to 10 years. At that point, a borrower has to pay off the
principal
balance in a lump sum. Under certain conditions, the mortgages can
be converted to fixed-rate or adjustable-rate loans. Many borrowers
either sell their homes before they get to their due dates or end
up refinancing their balances into new mortgages.
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Save
on mortgage costs initially -- a great option if you don't plan
on living in the home long. |
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Plans sometimes change. Will have to pay off
or refinance balance, with time, effort and more closing costs.
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Assumable mortgages
Assumable mortgages are relatively rate. A homeowner
with an assumable loan can "hand off" the loan to a buyer
instead of paying it off using proceeds from the home sale. If rates
are low and you can get one, by all means do so. If rates rise,
buyers will want to assume your loan (and will be willing to pay
more for your house!) because it'll be much cheaper than any loan
they could get from a bank or other source.
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Reduces
monthly payments and saves money on closing costs. |
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Sellers charge more for houses, so buyers need
more cash to cover the difference between asking price and
loan balance.
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Subprime mortgages
These days, even people with less-than-stellar
credit can buy homes -- as long as they're willing to pay up for
so-called subprime
mortgages. These loans have higher rates and more onerous terms
than conventional loans, but they can help bruised-credit borrowers
reap the benefits of homeownership just like their more credit-worthy
cousins.
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Opportunity
for those who can't prove income, have low credit scores, bankruptcies,
too much credit or need a higher-than-normal loan-to-value ratio
on property. |
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No consistency. Rates, fees and underwriting
guidelines vary drastically. Borrowers need to shop more to
find best rate.
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If you're shopping for a subprime mortgage,
you'll need to comparison shop and hone your negotiation skills. |
Construction mortgages
These loans help people who want to build homes,
rather than buy existing ones. They typically feature a two-step
borrowing process. Borrowers pay higher rates for the duration of
construction, during which time they draw money to pay their builders.
Then, they go through a second closing at which time the loan usually
converts to a traditional, long-term fixed-rate structure.
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As an alternative to a biweekly mortgage,
you could make one extra monthly payment
a year instead of making payments every two weeks. The term
of your loan will be reduced the same way as making biweekly
payments.
Some lenders offer a 40-year mortgage.
It reduces monthly payments but it also has major drawbacks
-- a radically higher interest bill over the life of the loan
and a much longer time to build up equity.
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