Choosing the right mortgage can seem like an exercise in confusion


Contact: Philip Sparks 916-752-2086

Choosing the right mortgage can seem like an exercise in confusion. There are so many variables to consider that you may feel like picking from a hat. Don't. Spend some time examining your options:

Fixed-rate mortgage
This is by far the most popular mortgage. It has a fixed interest rate and monthly payment that extend over the life of the loan. That's appealing to many buyers because it brings certainty to their monthly budgets. On the downside, your payments won't drop when interest rates do. The most popular fixed-rate mortgages run 15 and 30 years. However, most lenders will also grant 20 and 40 year mortgages as well.
Adjustable-rate mortgage (ARM)
This one is for those of you who like to take risks. The interest rates on ARM's change periodically. If interest rates go up, so do your monthly mortgage payments. On the flip side, if interest rates drop, you save money with lower payments. ARM's fall into two general categories, with many variations:		to top
1.	One-year ARM's adjust their rate annually.
2.	The second type adjusts according to a schedule agreed upon by you and your lender. A 3/1 ARM, for example, gives you a fixed interest rate for three years and an annual adjustment thereafter.
Adjustable-rate mortgage terms usually run for one, three, five, seven or 10 years. Most ARMs have caps that limit increases to a certain amount, usually 2 percent at each adjustment and 6 percent over the life of the loan.
Graduated-payment mortgage
This is a good option for buyers who expect their incomes to rise. Basically, a percentage of interest is delayed and added onto the principal. The disadvantage is that your loan balance increases, rather than decreases, for the first few years. Your monthly payments start out low. Then they increase each year by about 5 percent to 7.5 percent, until they include all the interest due with each payment.
Graduated-equity mortgage
If you want to quickly earn equity in your home, this may be a viable option. Your payment starts at a typical rate, but increases each month according to a graduated payment schedule set up by you and your lender. The increased payments reduce your principal, thus shortening the loan's term and cutting your interest.		to top
Shared-appreciation mortgage
This may be a good bet if you plan to sell your home within five years. You get a lower interest rate in exchange for sharing the home's appreciation with your lender. When you sell your home, or five years later-whichever comes first-you must split up to 50 percent of the increased value with your bank. For example, if the value of a $125,000 home increases to $175,000 in five years, the homeowner will owe the bank half of the $50,000 appreciation. Keep in mind that the appreciation is based on market value, not the amount for which you sell your home. If you sell below market value, you will still be obligated to pay a percentage of market appreciation.
Balloon mortgage		to top
Lenders don't generally offer balloon mortgages on homes, but buyers can sometimes obtain one from a home owner willing to finance the house personally. Balloon mortgages require the buyer to pay interest only for a set period of time, usually three to five years, after which the principal comes due all at once. For example, assume you're buying a $100,000 house from an owner willing to finance the sale personally at 8% interest with a 15% down payment over five years. You will pay $15,000 down to the owner at closing as well as other associated costs. That leaves you with a $15,000 equity in the house, and a debt to the owner of $85,000 remaining to be paid. The ultimate risk with a balloon mortgage is that you will be unable to pay off the balloon or get refinancing at the end of the term, in which case you could lose your home, and all the money you've paid to the owner up to that point.
Other types
By paying biweekly you can save interest and build equity more quickly than you could with monthly payments. Essentially you are making 13 monthly payments each year. The result is that you could pay a 30-year mortgage in approximately 22 years. A no-doc/low-doc mortgage requires a down payment of 25 percent or more and comes with a higher interest rate. But the lender runs no income verification. This type of mortgage is generally recommended if you want to expedite the process, you don't have a steady income, or you are self-employed. Reverse mortgages appeal to older borrowers who own their own home and want to cash in on its equity. The lender sends the homeowner a payment each month and the homeowner lives in the house for the remainder of his or her life. Upon the homeowner's death, the estate must repay the money with interest. Typically, the home is sold to pay the loan.
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