Mortgage Loans: Choosing the right mortgage

Review all the basic loan programs available today.

Years ago there were three types of mortgages available to home buyers. Buyers could get a fixed-rate conventional mortgage, an FHA loan or a VA loan. Times have definitely changed. There is an array of mortgage loan types available now -- as the saying goes: more mortgage loan types than you can shake a stick at!

Popular Types of Mortgage Loan Programs 

·      Fixed-Rate Mortgage Types

This is the granddaddy of them all. Now you can choose from 10-year, 15-year, 20-year-, 30-year, 40-year and even 50-year fixed-rate mortgages, all of which are completely amortized.

·                                 FHA Loans

FHA mortgage loan types are insured by the government through mortgage insurance that is funded into the loan. First-time home buyers are ideal candidates for an FHA loan because the down payment requirements are minimal and FICO scores do not matter.

·                                 Interest-Only Mortgage Types

Calling a mortgage loan type an "interest-only mortgage" is a bit misleading because these loans are not really interest only, meaning the borrower pays only interest on the loan. Interest-only loans contain an option to make an interest-only payment. The option is available only for a certain period of time. However, some junior mortgages are indeed interest only and require a balloon payment, consisting of the original loan balance at maturity. 

            VA Loans

This type of government loan is available to veterans who have served in the U.S. Armed Services and, in certain cases, to spouses of deceased veterans. The requirements vary depending on the year of service and whether the discharge was honorable or dishonorable. The main benefit to a VA loan is the borrower does not need a down payment. The loan is guaranteed by the Veterans Administration, but funded by a conventional lender.

Hybrid Types of Mortgage Loans

 ·                                 Option ARM Mortgage Types

Option ARM loans are complicated. They are adjustable-rate mortgages, meaning the interest rate fluctuates periodically. Like the name implies, borrowers can choose from a variety of payment options and index rates. But beware of the minimum payment option, which can result in deferred amortization.

 ·                                 Combo / Piggyback Mortgage Loan Types

This type of mortgage financing consists of two loans: a first mortgage and a second mortgage. The mortgages can be adjustable-rate mortgages or fixed-rate or a combination of the two. Borrowers take out two loans when the down payment is less than 20% to avoid paying private mortgage insurance.

 ·                                 Adjustable-Rate Mortgage Types

 Adjustable-rate mortgages (ARMs) come in many flavors, colors and sizes. The interest rate fluctuates. It can move up or down monthly, semi-annually, annually or remain fixed for a period of time before it adjusts.

·                                 Mortgage Buydowns

Borrowers who want to pay a lower interest rate initially often opt for mortgage buydowns. The interest rate is reduced because fees are paid to lower the rate, which is why it's called a buydown. Buyers, sellers or lenders can buy down the interest rate for the borrower.

 Specialty Mortgage Loan Types

                                  Streamlined-K Mortgage Loans

Like the 203K loan program, FHA has another program that provides funds to a borrower to fix-up a home by rolling the funds into one loan. The dollar limits for repair work are lower on a Streamlined-K loan, but it requires less paperwork and is easier to obtain than a 203K.   

             Bridge / Swing Loans 

These types of mortgage loans are used when a seller has put a home on the market -- but it has not yet sold -- and the seller wants to borrow equity to buy another home. The seller's existing home is used as security for a bridge (also called swing) loan.  

• Reverse Mortgages 

Reverse mortgage are available to any person over the age of 62 who has enough equity. Instead of making monthly payments to the lender, the lender makes monthly payments to the borrower for as long as the borrower resides in the home. The interest rate can be fixed or adjustable.   

• Equity Mortgage Loan Types

Equity loans are second in position and junior to the existing first mortgage. Borrowers take out equity loans to receive cash. The loans can be adjustable, fixed or a line of credit from which the borrower can draw funds as needed.

Home Equity Loan Traps: Consider how wealthy people view borrowing. They use debt only as a means to build more wealth, a philosophy foreign to many home equity borrowers. Here are some common second mortgage loan traps that serve as temptations to many. A home equity loan has numerous tax incentives, and provides easy access to cash. Even with these perks, it's still debt, and not a cash windfall. If you're taking out a second mortgage, make sure that it's for the right reasons, and avoid the following home equity loan traps.

 

Using a second mortgage for investments

On paper, using a home equity loan to invest in the stock market might seem like a good idea. Why not take home equity cash, borrowed at approximately 8 percent, and invest it in a stock that will return 18 percent? This no-brainer maneuver has one catch: No investments can guarantee a return of 18 percent.

The only time that this type of move may be warranted is when you're launching your own business. Banks and other financial institutions are typically unwilling to lend cash to new ventures, so tapping your home equity might be your only source of capital.

Borrowing for an extra tax-deduction

A time-honored piece of advice from accountants is never to buy anything just for the tax deduction, which is meant to soften the blow of borrowing or spending money. In theory, this money is supposed to be used to improve the value of your home, or launch an enterprise. Borrowing only for a tax deduction, however, increases your debt. It doesn't make sense to spend a dollar just to save 20 or 30 cents on your taxes.

Consolidating debt

Propelled by the glut of debt consolidation offers on the market, many homeowners use a home equity loan to consolidate their debt. This maneuver only prolongs suffering-spreading out interest payments and, ultimately, costing the homeowner more in long-term interest. The key is to change your money management habits. Stop spending more than you earn, and use any savings to aggressively pay down that debt. It will be painful, but you'll be in better financial shape in the long run.

Pay for new luxuries

Life is short, so why not tap some equity and buy the car or boat of your dreams, or fly to Paris for a springtime vacation? Homeowners succumb to this temptation every day. Such spending may deliver short-term bliss, but it won't help you build long-term wealth. Instead of adding debt, try to create assets that will allow you to achieve the lifestyle of your dreams. Reckless spending will catch up with you eventually.

In our culture, debt is readily accepted, especially if it allows us to enjoy the lifestyle of the rich and famous. That motivation, however, is not a long-term, sustainable plan, unless you already are rich or famous. Tapping your home equity to improve your home, or launch a business, is justifiable. Otherwise, resist the temptation to take out a second mortgage.  

Reverse Mortgages

Reverse mortgage are available to any person over the age of 62 who has enough equity. Instead of making monthly payments to the lender, the lender makes monthly payments to the borrower for as long as the borrower resides in the home. The interest rate can be fixed or adjustable.