| Mortgages
At A Glance
Below
is a brief synopsis and the pros and cons of some of
today's most popular mortgage loans.
|
| 30-Year
Fixed Rate |
| |
Definition |
A
long-term loan in which principal and interest are
amortized over 30 years; both interest rate and amount
of monthly payment remain unchanged for life of the
loan. |
| |
Advantages |
Considerable
tax benefits, especially in early years. Payments
never rise, regardless of inflation. |
| |
Drawbacks |
Slow
equity build-up |
| |
Comments |
The
most common mortgage in the U.S., a particularly good
investment when rates are low. |
|
|
| 15-Year
Fixed Rate |
| |
Definition |
As
above but pay back period is 15 years. |
| |
Advantages |
Usually
lower interest rate than 30-year. Faster equity
buildup. Less interest paid out over life of loan. |
| |
Drawbacks |
Higher
monthly payments. Less tax-deductible interest. |
| |
Comments |
An
excellent option for middle-aged and older buyers. |
|
|
| ARM
(Adjustable Rate Mortgage) |
| |
Definition |
A
mortgage whose rate changes over time according to
terms specified by the lender, usually according to
short-term Treasury Bill rates. |
| |
Advantages |
Low
initial interest rate, sometimes below market.
Payments may decrease over time. |
| |
Drawbacks |
Payments
may increase over time. Risky if rates rise
significantly. |
| |
Comments |
Good
option for buyers whose income will rise and/or when
rates are expected to drop. |
|
|
| FHA/VA
Mortgage Loans |
| |
Definition |
Government
insured or guaranteed mortgages that can make purchase
more affordable than conventional loans. |
| |
Advantages |
Little
or no down payment required. Marginally better rate
than conventional 30-year mortgages. |
| |
Drawbacks |
Lower
limits on the maximum that can be borrowed. VA
requires current or past military service. |
| |
Comments |
Good
option for first time buyers with little to invest in
a down payment. |
|
|
| GPM
(Graduated Payment Mortgage) |
| |
Definition |
A
fixed rate mortgage offering low initial monthly
payments that increase by a pre-determined amount,
then level off after about five years. |
| |
Advantages |
More
affordable payments for first few years. Unlike ARMs,
buyer knows up front how much payments will rise in
future. |
| |
Drawbacks |
Slower
equity build-up. Buyer's income may not rise in
proportion to payments. |
| |
Comments |
Another
good choice for buyers who expect income to rise
substantially after home is purchased. |
|
|
| Lease
With Option To Buy |
| |
Definition |
An
agreement between tenant and landlord in which a
portion of monthly rent may be credited toward
eventual purchase of the property (usually within
12-24 months). |
| |
Advantages |
Lower
initial down payment. Chance to "try it before
you buy it." |
| |
Drawbacks |
No
tax benefits during lease period. Probably higher than
average rent. If purchase option isn't exercised,
option money is usually forfeited. |
| |
Comments |
Good
choice for buyers unsure about city or neighborhood,
and sellers who are having difficulty selling with
traditional terms. |
|
|
| SAM
(Shared Appreciation Mortgage) |
| |
Definition |
An
arrangement in which a third party investor (the
buyer's parents, for example) provides a percentage of
the down payment and retains the same percentage of
ownership and appreciation until the occupant/buyer
buys them out at a later date. |
| |
Advantages |
Less
cash required for down payment. Some tax benefits. May
be easier to qualify for than conventional financing. |
| |
Drawbacks |
Slower
equity build-up. Buyer is indebted to two parties. |
| |
Comments |
Good
idea for parents or other family members who wish to
help a relative purchase a home. |
|
|
| Balloon
Mortgage |
| |
Definition |
A
short-term (3-5 years) loan, usually at a fixed rate,
paid back in equal monthly payments and a final
"balloon" payment for the remaining balance. |
| |
Advantages |
Lower
monthly payments. Full tax benefits. |
| |
Drawbacks |
Little
or no equity build-up; monthly payments are often for
interest only. Balloon payment usually requires
refinancing or selling the house. |
| |
Comments |
Designed
for buyers who plan on moving within a few years
and/or are confident in the short-term appreciation of
a property. |
