Just ask Nicole and Jonathan Goldman. In 2001, the Massachusetts couple was preparing for a lengthy "world tour" with their two children. They decided to see if they could improve on their 6.75 percent, 30-year fixed loan, figuring that lower house payments would offset some of the cost of the trip. After investigating their options, they settled on an exotic alternative: a six-month adjustable-rate loan on which they pay only the interest due each month for the first 10 years. With a 4 percent initial interest rate, the new mortgage slashed the Goldmans' payments by about half, to $1,422 a month. There must be a catch, you say. Well, yes. Because the rate is adjusted biannually, the Goldmans have no way of knowing how much the loan payment will rise or fall every six months. And in 10 years, when it's time to start paying back the principal, their monthly nut will suddenly jump by hundreds of dollars. But Nicole Goldman is unfazed. "Interest rates may go up in the near future, and if that happens I can switch back into a fixed-rate mortgage before they become too high," she says. "At current rates, and with the savings I'm getting over my original mortgage, I can live with a certain amount of risk." For like-minded homeowners, there are plenty of deals to be had, even as interest rates begin to creep up. Besides interest-only loans, borrowers can choose from a panoply of fixed and variable rates; so-called negative-amortization mortgages, in which the monthly payment is less than the interest and principal due for a predetermined period of time; and no-down-payment loans that cover 100 percent of the value of the home. There’s even a new portable mortgage from Etrade Financial, a fixed-rate loan that homeowners can take with them to their next house. "There's a loan for every type of individual and every type of circumstance," says Norm Bour, a mortgage broker who hosts The Real Estate and Finance Hour, a nationally syndicated radio show based in Southern California. "People should find a loan that suits their tastes — it's available somewhere — because they're going to live with it for a while." Here's a look at the most popular of the newfangled and traditional mortgages, and advice on how to choose the loan that’s right for you. Still the most common home loans, these typically carry a term of 15 or 30 years. A fixed-rate mortgage can cost 1 percentage point or more above a variable-rate loan, but it's a no-risk option because the interest rate is locked in for the life of the mortgage — an advantage that is often overlooked by home buyers with short memories. "Interest rates were 8 percent in 2000 and 10 percent in 1990," says Rob Bernabe, head of retail mortgage lending at Etrade. "Today's low rates are a gift, in my mind. Who knows how much higher they'll be next year or the year after?" Choosing between 15- or 30-year loans comes down to simple arithmetic. At an interest rate of 5 percent, a $200,000, 15-year mortgage would run $1,582 a month; a 30-year version, which usually carries an interest rate about 1 percent higher, would cost $382 less per month. Although the monthly outlay is greater with the 15-year loan, less of it goes to interest: about $44,000 in the first five years, versus $58,000 for the longer-term version. For many people, the difference in monthly costs is negligible, while the interest saving is a convincing argument for going with the shorter term. Homeowners who are closing in on retirement would do well to take out a 15-year loan and pay off much of their housing costs in the years when they still have earning power or early in their retirement. The 30-year loan, by contrast, is better suited for younger people, ideally those who are active investors. With no rush to pay for their home, they could use the money they save each month to invest in stocks, bonds, or mutual funds that could potentially give them a greater annual return than the percentage difference between the two mortgages. |
|
|||
. |
||||
|
||||
Seems like you can't turn around these days without somebody trying to sell you a dream mortgage. As rates hover at record lows, lenders and mortgage brokers are blanketing TV, radio, billboards, and the Internet with ads offering every permutation of a low-price, low-points loan. For financially creative homeowners, all of that activity has been an unexpected windfall.