Popular Mortgages
The sheer number of loan products in the marketplace is staggering. The rush to own property over the past two decades has spurred the creation of many flavors of mortgage loans to match the various demographic groups seeking them. The following sections describe the major types of loans and who generally qualifies for them.
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These products, aimed at buyers trying for a lower monthly payment, became popular twenty years ago. They provide a fixed payment for anywhere from one to ten years, after which time the rate readjusts. Customers with the best credit get the best rates, but first-time homebuyers might go for these products because the payments can be considerably lower initially. The worry comes in when the rates adjust in a significantly higherrate environment, as has happened in recent years.
This loan option became increasingly popular as home values rose during the recent real estate boom, but it has also received partial blame for the rising rate of foreclosures during the bust. This type of loan option allows a borrower to pay only the interest on the mortgage in monthly payments for a fixed number of years, usually five to seven. After that point, the buyer has the option to refinance, pay off the higher balance, or face what could be a significantly higher monthly payment. Interest-only loans are a good idea for people who want to use such loans strategically, for example, people expecting a windfall that would wipe out their debt at the end of the term or who will be earning enough to make the new payments painless. Increasingly, these interest-only loans have been marketed to subprime borrowers, who face the greatest risk when the payments readjust.
Just as it sounds, this form of mortgage allows a borrower to buy a home with no down payment. This strategy can work out well if home prices are increasing reliably (and hopefully aggressively). But experts advise that lenders who can't afford a down payment and who qualify should consider a low down-payment alternative, such as FHA-backed loans that allows them to build at least a little equity at the start.
For most Americans, it makes sense to own a home, particularly for the tax benefits and the comfort of not being someone's tenant. But you need to buy within debt levels you can handle and be in a position to build equity in your property.
Yes, there are such things as forty-year fixed-rate loans. The advantage is that their monthly payments are significantly lower than shorter-term loans, and borrowers don't have to take the risk of an adjustable-rate mortgage. On the other hand, think about this term: forty years to pay off a loan? It's definitely a problem-solver for some people confident they'll make more money and be able to refinance their loan into a shorter-term mortgage. But you absolutely do not want to stick with a single mortgage for forty or possibly fifty years. You will accrue equity at a snail's pace, and over the long haul, it makes no sense.
Also known as 100-plus loans or LTV loans, this is another potentially risky option that draws in customers who can't make a down payment. These loans are made on 100 percent or more of a home's appraised value. If market values start to fall, as was the case in mid-2007, that's trouble for the borrower.
It's not uncommon for a lender to sell a loan to another lender for any number of solid business reasons. The important thing for borrowers to know is that the rate and terms of the payment won't change as a result. You should, however, see if you might risk losing favorable deals on your checking, savings, or business accounts tied to your original mortgage.
It's obviously gotten tougher to put a conventional 20 percent down payment on a home to avoid private mortgage insurance (PMI), which lenders typically demand to safeguard their investment. The reason? Home values have skyrocketed over the last twenty years.
Some borrowers have done an end run around PMI by taking out a concurrent first and second mortgage, also known as a piggyback loan. The most common is known as a 80/10/10, in which a first mortgage is taken out for 80 percent of the home's value, a down payment of 10 percent is made, and another 10 percent of the home's purchase price is financed in a second mortgage at a higher rate. Some lenders may allow a piggyback loan for less than a 10 percent down payment. But tax laws enacted in 2007 may make paying PMI a better deal. Check with your tax professional.
Negative amortization means you're not paying off the loan at all — your balance actually increases instead of decreases. People who want a small initial monthly payment use negative amortization loans in the hope they'll be able to refinance into a new loan that will build equity later. Yet many people who made this choice got into the market by the skin of their teeth, and the ugly combination of rising rates and slowing market values have forced them into foreclosure. (For more detail on this loan structure — and how to avoid it — see Chapter 15.)
When a borrower cannot qualify for any mortgage option, a seller with means may elect to extend credit to the buyer, who pays in regular monthly installments. This is not a typical arrangement. Often, it is established between parents selling their home to their kids or between individuals who trust each other. Both sides should definitely check each other's creditworthiness and consult an experienced real estate attorney and tax professional before they enter into such an arrangement.
