Mortgage Loans

   

Al Zan - 09/03/08

Flexibility and new options are the rule in the modern market. Mortgage loans are following the same trends: A decade or two ago, most first time homebuyers put down a 20 percent down payment and took out a fixed rate mortgage, but now over 40 percent have no down payment at all, and choose their mortgage from a wide variety of new options.

Now it is easier than ever to buy a house, even to consider a much more expensive house than you would have been able to dream of before, but the new types of mortgage that make this possible come with drawbacks. Even though the new mortgages all have lower payments initially, for most of them, the savings are short lived. The payments increase dramatically after the introductory period. The end result is a mortgage loan that costs far more than an old fashioned fixed rate mortgage would have cost you. Weigh your options carefully if you are considering one of the new types of mortgage loan.

Option adjustable rate mortgages (ARMs) offer you the chance to make one of four types of payment each month, ranging from what you would pay with a standard fixed rate mortgage loan down to a minimum payment even lower than the amount of the accrued interest. If your income is inconsistent because you do seasonal work or are a freelancer, then you may find the flexibility of an ARM to be ideal. In the lean months you pay the minimum, and in the fat months you pay extra to make up the lean months' shortfall. However, you can find yourself in a downward spiral of debt if you cannot make up the shortfall and the interest accrues. To successfully manage your ARM, you will need discipline.

ARMs are popular despite the potential danger. Their flexibility appeals to a wide range of people, making them even more in demand than bankers initially expected.

Interest only and negative amortization mortgages are two other popular types of mortgage loans. These loans offer the lowest possible minimum payments: Interest only mortgage payments cover only the interest, and negative amortization mortgage payments do not even cover the interest. If you cannot afford to make more than the minimum payments, the result will be a never decreasing principal, and possibly a load of accrued interest as well. Worse, your payments do not stay low forever; after the grace period, your payments skyrocket, making demands that you may not be able to meet. Too many people who went into these types of mortgage loans without knowing what to expect have had to sell their houses when the interest only period expired. Be cautious! Choose a mortgage based on your ability to pay the post introductory payments, not the low introductory payments. Families who are undergoing a period of hardship that they know will end soon, or investors who plan to sell a house well before the grace period ends, will find these kinds of mortgage loans to be perfect for their needs, but these loan types can be hazardous for ordinary buyers.

Piggyback loans are a method of avoiding private mortgage insurance (PMI). Banks usually require homeowners to take out PMI if their mortgage loan is worth more than 80 percent of the house's total value, so people who cannot come up with a 20 percent down payment on their own take out a piggyback loan to fill in the gap between what they can put down and what the bank requires them to put down. Piggyback loans represent savings because often they are structured as home equity lines of credit, making them tax deductible and dropping their payments below the average cost of PMI. The best news is that a piggyback loan is "safe"; although you must make an additional monthly payment to pay off the loan, the loan payments remain at the same level for the life of the loan and there are no hidden fees.

If you are considering a non traditional mortgage loan, educate yourself in the benefits and drawbacks before you commit. Here is a table that outlines the pros and cons of each:

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Article Category: Money and Business
Article Keywords: Loans,Mortgage,Mortgage calculator,Mortgage refinancing,Mortgage loans