| Below is a brief synopsis and the pros and cons of some of today's most
popular mortgage loans. |
| 30-Year Fixed Rate |
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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. |
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Drawbacks |
Slow equity build-up |
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Comments |
The most common mortgage in the U.S., a particularly good investment
when rates are low. |
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| 15-Year Fixed Rate |
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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. |
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| FHA/VA Mortgage Loans |
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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. |
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Comments |
Another good choice for buyers who expect income to rise
substantially after home is purchased. |
| |
| Lease With Option To Buy |
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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) |
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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. |
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| Balloon Mortgage |
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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. |
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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. |
