It is no secret that the most common mortgage available today is the 30-year fixed-rate loan. As the name would indicate, this loan is fixed for the next 360 months without any change to the principal and interest payments. For many homeowners, this is the loan they are most comfortable with, as they like knowing what their payment will be for the life of the loan. While this is the most common loan, it is certainly not the only one out there. Between adjustable rate loans, interest only options and different payment terms, there may be an option that is more suited to you than the 30-year fixed option.
One of the most popular culprits of the mortgage meltdown was the adjustable rate mortgage. The issue wasn’t that they were made available, but in whom they were made available to. Many sub-prime lenders targeted buyers with sub-par credit and sold them on a slightly lower payments for the first 2 or 3 years in order to get them in the property. After the fixed period wore off, the loan then adjusted to current market rates which were higher than their existing payment. Any increase in payment caused these homeowners to struggle with their payment and ultimately lead to foreclosure.
With the right borrower and in the right situation, an adjustable rate loan can make a lot of sense. If you are buying the property with the intent of holding it for a few years max, why not take a loan suited to your wants and needs? Depending on the loan size, an adjustable loan can save the borrower in upwards of $100 or more a month. This is not a staggering amount of money per month, but for the three years or so you have the loan, you are looking at thousands of dollars in savings.
The detractors will tell you to take the security of the fixed rate in the event that you decide to keep the loan. Under that rationale, the scenario does make sense. Nobody knows where rates are going to be in three to five weeks, let alone three years, but the odds are they will go up. If the change in payment is not that great between the adjustable and the fixed rate, you should definitely go with the fixed rate. If you know you are going to sell or there is a definite change in income in the future, the adjustable rate could make sense for you.
Interest only loans work in a similar way, in that they are only good for the designated term of the interest only portion. If you have a seven year interest only loan, you are only paying interest for that period. This is great for self-employed borrowers as a way to reduce payments in the short term, but after seven years is up, the principal has to be repaid. This will increase the payment substantially and can be quite a payment shock. Also, in this time you will not be paying down the mortgage so you are not building much, if any, equity.
There are many different loan programs and options available. Some can be a good fit while others you should not even consider. Talk to a mortgage broker or lender to find out all of the options you have available before you move forward with any loan.
