Finding the Best Mortgage Program

Unlike in the past, today’s homebuyers have a variety of mortgage programs from which they can select the best program for their particular circumstances.  Lenders are barraging the media with promises of competitive interest rates, specials on second-mortgage programs, down-payment assistance, no closing costs and a variety of other special features.  The problem that consumers face is not a lack of information, but rather quite the opposite.  The media blitz by mortgage lenders often confuses even the most financially savvy homebuyer.

First-time borrowers are at risk of being swayed by promises of up-front savings and thereby selecting loan programs that do not meet with their future goals. 

Any good realtor will advise you to become an educated consumer. Your realtor can help you learn to ask the right questions and to move on when the answers are not what you need to hear.
 
The following text is an overview of the three most common types of mortgage programs available to homebuyers.  Some are aimed specifically at first-time homebuyers; others are open to any buyers who meet the eligibility criteria.  Review this information carefully, ask your realtor about recommended loan programs, and consider every aspect of a program before deciding which one is your best option.

1. Fixed-Rate Mortgage
Without question, the fixed-rate mortgage is the most common type of mortgage loan.  The interest rate is fixed at a set percentage when you receive your approval, and it does not change during the lifetime of your loan.  Therefore, there is a set number of identical payments.  For example, if you borrow a 15-year fixed-rate mortgage, you will have 180 equal payments.  If you elect to spread your loan over 30 years, you will have 360 equal payments.

Some lenders are beginning to offer 40-year extended fixed-rate mortgages and even 20-year loan programs.  The benefit of a longer repayment term is that your payments will be substantially lower. However, keep in mind that with a shorter repayment period you will build equity in your home much more quickly.

Fixed-rate mortgages generally require a lower down payment than do other loan programs. The current average down-payment percentage is between three and five percent.

When you borrow a 30-year fixed-rate mortgage, you are eligible for a better tax advantage due to the higher amount of interest that can be deducted when you file your income taxes.

The 15-year fixed-rate mortgage is a great program for those who want to reduce the amount of interest they will pay over the life of their loan.  As the name of the program suggests, buyers who opt for a 15-year mortgage will pay off their home in half of the time that it takes a buyer who opts for a 30-year loan.

The advantage of a 15-year mortgage is not only the early pay-off, but also that borrowers can use the equity in their home sooner to pay for educational costs, remodeling projects, and other expenses.  This is a good option for those who plan to stay in their starter home for only a few years before moving on to a bigger or newer home.

2. Adjustable-Rate Mortgage
Adjustable-rate mortgages, or ARMS, are a good alternative for homebuyers who do not expect to live in their home for the full 30 years of their initial mortgage.  The initial interest rate on an ARM is generally lower than that of a fixed-rate mortgage, which means lower initial payments. 

ARMs are also a good option for first-time homebuyers who anticipate that their future earnings will increase.  The lower initial payments are easier to afford at a starting salary in a new career. As the homeowner’s payments increase over time, his or her salary probably does too.  Many homebuyers can qualify for a higher mortgage amount under an ARM than under a fixed-rate mortgage program.

Many lenders allow borrowers to lock in their lower initial interest rate for a period of up to ten years.  For those ten years, the loan repayment is identical to that of a fixed-rate loan and the interest and principle payments are equal.

With an adjustable-rate loan, the interest rate directly correlates to movements in the market interest rate since the time that the loan was made.  Therefore, a borrower who sees market interest rates decline after purchasing a home will see a decrease (not an increase) in the interest rate of the mortgage.  Obviously, this means lower monthly payments.

3. 7- to 10-Year Balloon Mortgage
Balloon mortgages are much more complicated than conventional fixed-rate and adjustable-rate mortgages.  Many potential borrowers shy away from balloon programs when they learn that the loans are generally issued only with a repayment term of seven to ten years.  What these borrowers might not understand is that, at the end of the initial loan period, the borrower has the option of either paying off the loan amount with one payment or refinancing the remaining loan amount with another mortgage product.

Balloon mortgage programs are almost at type of creative financing. The borrowers who opt for this type of loan are generally short-term buyers who want or need a low initial mortgage payment and who plan to sell within the timeframe of the initial mortgage.

Thirty-year fixed-rate mortgages are generally the type of loan that permits the great advertised rates you see on billboards and television.  However, the interest rate on a balloon mortgage is often even lower than that.

Although the buyer’s initial intention may be to move to another home or city within the seven- to ten-year period of the balloon mortgage, situations often change over time.  Therefore, the borrower is given the opportunity to refinance the remaining balance at the end of the initial loan period.  Some might call this a borrower’s safety net, to be used if the plans for the future change course along the way.

Now that you have read this general introduction to the most common types of loan programs, take some time to review the specific programs offered by your lender.  If you are uncertain as to which lender you would prefer to work with, feel free to ask your realtor for guidance. Realtors have good working relationships with mortgage companies and may be able to direct you to someone who can answer your questions.

Consider the three types of mortgage programs listed above and then contact lenders or view their websites to determine what other options might be available.

Be an educated consumer.  Contact your realtor today for help in determining which type of loan program might work best for your unique situation. And, more importantly, research the lenders to ensure that you are working with a professional mortgage company with a solid history. 

It’s your money, and you need to protect it wisely.