mortgages' gain a foothold
There's a lot more out there than plain-vanilla
30-year fixed-rate mortgages.
There are mortgages for
people who have little or no down payment money. There are loans for people, such
as doctors just out of medical school, who expect their incomes to skyrocket.
Loans for people who plan to move within a few years. Loans for observant Muslims,
who are prohibited by Islamic law from paying interest.
lot of people are just thinking 30-year fixed," says Bob Walters, senior
vice president of Quicken
Loans, "and if someone tries to sell them something else, they think,
'Hey, are you trying to scam me or something?'"
The answer is no. A good mortgage broker or loan officer will ask questions to
find out what kind of loan best suits you. It might not be a 30-year fixed-rate
loan. Walters says, with perhaps a bit of hyperbole, that 30-year fixed-rate home
loans "are not the right mortgage for 90 percent of borrowers."
case for hybrids
Walters feels passionately that most borrowers
would be better off getting hybrid ARMs -- adjustable-rate mortgages that have
an initial interest rate that lasts three to 10 years, then adjusts annually thereafter.
The most common hybrid arms
are known as 3/1, 5/1, 7/1 and 10/1. A 3/1 ARM starts out with a low rate that
lasts three years, then is adjusted annually. A 5/1 ARM has an introductory rate
that lasts five years, and 7/1 and 10/1 ARMs have intro rates that last seven
and 10 years.
Right now, people with good credit can get 3/1
ARMs at less than 5 percent. Rates are so low today that it's almost certain that
a 3/1 ARM's rate will rise after three years. Most ARMs can't rise more than 2
percentage points annually. So if you get a 3/1 ARM today at an introductory rate
of 4.5 percent and stay in the house four years, you will pay 4.5 percent for
three years, and 6.5 percent the fourth year.
to paying 5.5 percent for four years on a 30-year, fixed-rate loan of $150,000.
Over four years, you save $3,100 interest by going with the 3/1 ARM, while building
about $400 more equity.
Walters feels impatient with borrowers
who ignore the advantages of hybrid ARMs. "People say, 'I'm going to be absolutely
sure to pay a higher rate now, on the chance that they might rise in three or
four years,'" he says. "It's a Depression-era mentality."
for the footloose
He could bolster his case by pointing out
that few people live in their homes long enough to pay off a 30-year mortgage.
Half of homeowners live in their houses for less than nine years. People who plan
to relocate or move up to a bigger house in a few years should seriously consider
There's always those buyers who are well-suited
to 30-year fixed-rate loans: People who have little or no down payment money.
Some 30-year loans allow them to get around the no-down payment squeeze.
Many lenders offer mortgages for 97 or 100 percent of the home's price. You might
see these marketed as Alt 97 or Flex 97 or Flex 100 loans, after the Fannie Mae
and Freddie Mac programs underlying them. You are expected to come up with cash
of 3 percent of the home's value, either as a down payment or to pay closing costs.
You also are expected to come up with a down payment of at
least 3 percent on loans insured by the Federal Housing Administration. These
FHA-insured loans are permissive about the source of the 3 percent, which can
come as gifts or as charitable donations. An industry of nonprofit
down payment assistance programs has sprung up because of this rule.
Here's how these programs work: The seller gives a 3 percent donation,
plus a handling fee, to the down payment assistance program, which then gives
a 3 percent grant to the home buyer to use as the down payment.
is better? Run the numbers
Which is better: getting a 100 percent
loan or getting an FHA loan using a down payment assistance program?
really good case can be made that FHA with down payment assistance can be a better
alternative," says Richard Ferguson, president of Neighborhood
Gold. The Provo, Utah,-based nonprofit has given grants to 30,000 home buyers.
To know for sure, you have to run the numbers. Ferguson says that FHA mortgage
insurance generally costs less than mortgage insurance on conventional loans,
and that rates on FHA-insured loans often are lower than rates on conventional
loans for 97 percent of 100 percent of the home's value.
and the cost of mortgage insurance aren't the only factors. When a buyer uses
a down payment program, the seller is less likely to bargain on the home's price.
That's another way of saying that buyers pay more for houses when they use down
Many buyers do the math and conclude that
down payment assistance is a better deal. About one-third of FHA-insured loans
go to buyers who use down payment assistance programs, Ferguson says.
There are other creative
ways to finance homes.
Interest-only mortgages, in which the
borrower is required to pay only interest for the first few years, are popular
with people with unpredictable incomes (for example, self-employed people whose
incomes are up one month and down the next). Interest-only borrowers have the
flexibility of paying only the interest when money is tight, and interest plus
principal when the money is rolling in.
also are popular with people, such as new doctors and lawyers, who know that their
incomes will rise much higher in a few years. Interest-only loans allow them to
buy houses that they otherwise can't afford, but will be able to afford in a few
Then there is financing for observant Muslims, who
are prohibited from paying interest. American
Finance House - LARIBA puts together lease-purchase deals that fall within
guidelines approved by Islamic scholars.