 |
Mortgages At A Glance
 |
| Additional Answers Sections Below: |
 |
|
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 payback period is 15 years. |
| Advantages: |
|
Usually lower interest rate than 30-year. Faster equity build-up. 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. |
 
|
