How Do I Choose the Right Kind of Mortgage?

• There are almost two hundred different mortgage options available, but once you examine them you´ll find that there are really only six or seven basic types. It´s just that in today´s personalized banking world, lenders try to offer products that are tailored for everybody´s specific financial concerns.

• Choosing the right mortgage depends on several different factors, including your current monthly income, your future expected income, current assets, and liabilities. Other factors might include whether you´d like to pay points up front, or over the life of the loan?

Do you want to gamble that interest rates will stay low and get an adjustable-rate mortgage (ARM), or would you feel more comfortable paying the same amount every month?

• If you plan to live in your house for only 3-5 years, you might consider a 5/25 or a 7/23 mortgage, or a one-year adjustable rather than fixed-rate mortgage.

• Here´s a list of some of the basic mortgages that are offered:

  1. Fixed-rate mortgage the oldest and most popular variety, a fixed-rate is constant through the life of the loan, and can be taken out in 10, 15, 20, and the most popular 30-year lengths.

  2. Adjustable-rate mortgages (ARM) have interest rates that fluctuate and are pegged to one-year Treasury bills or another specific index. The initial rate is low, but grows each year. There´s usually an initial yearly cap of two points, and also a lifetime ceiling cap of around six points. The rate can also drop.

  3. Two-step mortgages usually called 5/25s and 7/23s, come in two varieties: convertible (which converts the loan to a fixed loan for the remaining 25 or 23 years) and nonconvertible (which converts the loan to an ARM). Both are 30-year loans with fixed interest rates for the first 5 or 7 years, then change in to convertible or nonconvertible loans for the remainder. Both loans can be amortized over the 30 years. They´re considered riskier than fixed-rates, but less risky than ARMs during the first 5 or 7 years.

  4. FHA mortgage have pre-set spending limits. The amounts are set by the median prices of different cities within a particular area. The best part is that only a 5% down payment is required (sometimes only 3%). However, a steep mortgage insurance premium and other upfront costs are required.

  5. VA loans are designed to help military vets buy homes with no down payment. Also, veterans aren´t allowed to pay points, although they are responsible for some fees. Sometimes that´s a problem because the seller usually has to pay the extra money.

  6. Balloon mortgages these can be any length. Some you pay principal and interest, others only interest. In any case, the loan must be paid in full when it´s due in one of two ways: amortized over 30 or 50 years, and you pay the first 5 or 10 years before paying it off or refinancing; or you only pay the interest until the loan is due.

  7. Graduated payment mortgages (GPM) - were originally designed for first-time buyers so they could pay reduced mortgages early on, but it´s recently been phased out in favor of 5/25s and 7/23s (because they´re simpler to package).

  8. Shared-appreciation mortgages here the lender offers you a below-market rate in exchange for a share of the profits when the home is sold. You get all the tax benefits, and the lender doesn´t make money unless you do. On the other hand, if your home increases greatly in value, you could lose a lot of that profit to the lender. These types of mortgages are most common among first-time buyers working with non-profit groups that help low to moderate income families.

  9. Biweekly mortgage as the name implies, you pay half the amount of a monthly, and it´s paid 26 times a year (instead of 12 times for a monthly), which will ultimately cut down the amount of interest you´ll pay over the life of the loan. Its main drawback is that paying so often can be a hassle.