Mortgage lenders offer many features and restrictions that can be added to a variety of mortgage programs, but the following eight mortgage loans are the basic types you will encounter. No single loan is best for all circumstances, but here you’ll see what specific loan types work better than others depending on individual circumstances and lifestyles.
- Buying for the long haul.
- Refinancing (years before retiring).
- Recent graduate.
- Planning to live in home for 4 to 5 years.
- Job with good but inconsistent income.
- Job relocation for a short run.
- Active duty military or veteran.
Buying for the long haul
Loan to consider: 30-year fixed rate
Why: Financial peace of mind can be worth the higher interest rate that comes with an interest rate that won’t change for three decades.
Refinancing (15-20 years before retiring)
Loan to consider: 15- or 20-year fixed or adjustable rate mortgage (ARM)
Why: You can retire the loan before you retire from your job. A fixed rate generally costs more than an adjustable, but will give you more certainty in budgeting. However, if ARMs are significantly cheaper and your income can handle possible payment increases, you could save with the adjustable rate.
Recent graduate with strong potential for increased earnings
Loan to consider: One-year ARM
Why: Stretch your dollars with low interest rates during the years when your income is at its leanest. Your rate can go up (or down) each year, but interest-rate caps will limit that change to a predictable amount, and your rising income should be able to handle it. Watch out for loans that don’t cap the interest rate but instead cap your payment. They could cause your indebtedness to grow even as you make monthly payments. ARMs also come in varieties that adjust — up or down — every six months, or even more frequently.
Loan to consider: No- or low-documentation loan
Why: Though you’ll pay a higher interest rate, not having to produce paycheck stubs or employer references, as you would be expected to supply when applying for a traditional loan, can be a huge help to those with variable incomes.
Planning to live in home 4 or 5 years
Loan to consider: A 5/25 hybrid loan
Why: If you won’t keep the loan longer than five years, why pay extra to lock in an interest rate for a longer period? If you do end up staying longer, you can either refinance, or live with an interest rate that adjusts every year.
Job with good income, but not consistent month to month
Loan to consider: Option ARM
Why: These loans, considered among the riskiest offered in recent years, originally were designed for people with incomes that vary a lot from month to month. Each month you have a choice of payments: The full amount needed to pay off principal and interest as scheduled, an amount that covers only the interest owed that month, or an even smaller amount that doesn’t even cover interest owed. In a month in which your earnings are lean, you might choose to make one of the lower payments, even though that actually adds to the amount of debt you must eventually pay back. In a month of strong earnings, you could choose to make the full payment. Over time, however, your required payments could rise significantly if you have frequently chosen to make only the smaller payments.
Job relocation for a short run (with good income and savings)
Loan to consider: Interest-only mortgage
Why: While these loans can be risky for novice borrowers or those stretching to afford a home, they can be a smart tool for financially sophisticated borrowers who already have assets built up. Monthly payments are low because you’re not repaying principal, so you can afford a larger loan. If you eventually sell the home for less than you paid, however, you could have to take money out of savings to pay back the full amount owed on your mortgage.
How about you? Are you concerned about your mortgage? Pleased with the one you have?
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