Choosing Mortgage Loans with Care

In recent history, the majority of Americans saved up down payments totaling 20 percent of the purchase price and paid off the remainder with fixed rate mortgage loans when buying a home. Many continue to do this, but as of late it has been trendy to have mortgage loans with smaller down payments and terms that vary. The National Association of Realtors claims that 42 percent of new home buyers do not even put money down, these days. Even though buyers may be able to get a house beyond their means this way, we should proceed with caution in obtaining no down payment loans. It is common for these new mortgage loans to offer lower payments, temporarily. However, they can end up costing quite a bit more than typical mortgage loans over time. This is due to the fact that in nearly all instances, the monthly payments increase drastically after a trial period. Option adjustable rate mortgage loans (ARMs) feature up to four options monthly, from a full amortized amount (such as traditional fixed rate mortgage loans) to low payment minimums, and their mass approval has shocked even veterans of the field. President of LendingTree.com, Anthony Hsieh, recently told CNN: "Traditional banker that I am, I didn't think there would be much interest in this product, but consumers have loved it." Nevertheless, Hsieh does not believe that options ARMs are one size fits all: "If you have seasonal income or are self employed with monthly income that is inconsistent, this loan may be great for you. You can pay the minimum a few times per year and catch up in the months when your income is higher." In the case that you have trouble doing that, though, you could end up in serious debt. Interest only and negative amortization mortgage loans are rising in popularity, too. These mortgage loans are dissimilar to traditional loans in that they are not amortized. Rather than paying interest and principal together every month, this means that you need only pay interest. Also, if you have a negative amortization mortgage, you do not even have to pay all of the interest that is due. Such mortgage loans are sensible for homeowners who have a temporary decrease in income, for instance being laid off, or having a spouse return to school for a little while, as long as income will once again rise to previous levels in the short term, when the homeowners should refinance to an amortized mortgage. If an investor is considering only holding onto a property temporarily before selling, interest only loans could be the ideal option. However, some borrowers choose interest only or negative amortization loans without comprehending that they could be losing precious equity with every month that goes by. Also, after a little while, interest only options change and mortgages have to be repaid on an accelerated time schedule. If it is impossible for mortgage holders to repay the higher payments that are incurred, they might have to sell the home. Fortunately, piggyback loans are another option that help homeowners avoid extra fees incurred by private mortgage insurance (PMI) which lenders often charge if a loan is worth over 80 percent of the value of the home. If a buyers is able to pay a down payment as small as 5 to 10 percent of the down payment, often they can get a piggyback loan to finance the remainder. Essentially, piggy back mortgage loans are a second mortgage, often structured to be a home equity credit line, that in effect could be cheaper than PMI, partially because it is tax deductible. Piggy back loans, however, entail another monthly payment in addition to the cost of the first mortgage loan. As you would involving other financial choices, it is wise to understand the risks in atypical mortgage loans before deciding which is the best for you. The chart that follows explains the pros and cons of each possibility.