Thursday, February 8, 2007

Mortgage Lending Options

If you've listened to the radio, watched tv, or read any type of news lately, you've probably seen 10 ads from mortgage companies. How can there possibly be so many different types of mortgages available today? I heard an ad the other day on the radio offering a 0.25% loan - $104 per month on a half-million dollar loan! Come on.. Let's get real.

First of all, nothing's for nothing. Lenders are in business to make money, not to give you a free loan. Yes, interest rates and closing costs can & will vary from one lender to the next, so it pays to shop around. But that's small potatoes compared to what the different loan programs can cost in the long run.

I'm going to discuss the various types of alternative mortgages in greater detail in future posts over the coming weeks, but for the time being I'll simply make a blanket statement about them. Adjustable Rate Mortgages, Negative Amortization, Interest Only, Balloons, 2-Steps - these are all predicated on the concept of "lower your monthly payment today..." But they never seem to mention the other half of the concept, "you'll need to do something different later, and you'd better hope interest rates cooperate!"

The bottom line is that you are going to have to pay back the money you borrow. Period. So it's probably a good idea to look at what your mortgage payment would be on a 30 year, fixed rate, fully amortized loan. If you can make this payment, you can afford your home. If you can't, you need to have a really good reason why a specialty mortgage will work for you (and yes, there are a few really good reasons). If you can't make the standard loan's payment, and you don't have a really good reason to use an alternative loan (and wanting the house very much isn't a good enough reason), you're going to have to face the music eventually.

The standard 30 year, fixed rate, fully amortized mortgage is the safest mortgage available. You never have to worry about interest rates changing, and you know that if you can make the mortgage payment, you can own your home free and clear in 30 years. You can make larger payments, without penalty, to pay the loan off earlier. If interest rates in the marketplace go down, you can refinance to take advantage of them. If interest rates go up, you can smile every time you make a mortgage payment.. No risk. (Even better is a 10, 15, or 20 year standard loan.)

As I mentioned earlier, I'm going to discuss each of the various types of mortgages in greater detail, including their benefits and risks, over the coming weeks. However, I believe this is the mortgage that 9 out of 10 people should use to finance their home.