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SELECTING A MORTGAGE PROGRAM
The selection of a mortgage program can be rather complicated, and we highly recommend that a mortgage professional help you with the decision process. There are a countless number of loan products available in the marketplace today, and the guidelines for these products change continually. A mortgage professional that stays current on these programs can play a valuable role in analyzing your options.
Here are a few items you need to consider before selecting a program:
- How long do you plan to own the home?
- What is your financial outlook for the near-term and long-term?
- Do you have future financial obligations (such as college, retirement, elderly care) that might limit your future ability to meet debt obligations?
- How comfortable are you with a payment amount that changes over time?
- Will you consider a balloon payment?
- What is your liquid asset position? Are you willing to make a larger down payment?
Are you self-employed?
- How is your credit history?
- Are you a first-time homebuyer?
- Will you have adequate funds available after debt payments for retirement funding and other needs?
As stated earlier, there are a number of mortgage products available. The most common types are the fixed-rate programs where the monthly interest and principal payments are fixed for the life of the loan. Other programs, referred to as ‘adjustable-rate’ loans, allow for the interest rate to change at specified intervals. The interest rate on adjustable-rate loans can go up or down depending on changes to the index interest rate on which the loan’s interest rate is based. Some adjustable-rate loans allow for a fixed period, such as one, three or five years, before the interest rate becomes adjustable. After that fixed period, the interest rate will change each year thereafter.
Another kind of adjustable-rate loan is the graduated payment mortgage, known as the “GPM,” where payments are fixed for only one year and will change by a specified amount annually. The advantage of the GPM is that often borrowers are able to qualify for a larger mortgage than they otherwise would, and may be able to ‘grow into’ the payment if it later increases. Unfortunately, this type of program is not for everyone because many GPM programs have negative amortization, meaning that the loan balance can actually increase since the interest rate used to calculate payments in the early years of the loan is lower than the rate used to calculate the interest that accrues. The shortfall is added to the loan amount. The loan fully amortizes (or pays off by the scheduled end of the mortgage term) by raising the interest rate in the later years to offset the shortfall.
Another program for specific needs is called a “balloon” mortgage. Balloon programs are ideal for borrowers who know they will not occupy the home for long periods of time. For example, the borrower may know that he or she will be transferred to another location in three years, and will likely sell the home and pay off the loan anyway. Since balloon loans usually have shorter terms (usually five to seven years) than a typical fifteen or thirty-year loan, the interest rate is often more favorable than that on a fifteen or thirty-year loan. A balloon mortgage usually offers many of the features of a fixed-rate loan, such as a conversion option to a longer-term loan in the event that your plans change unexpectedly. A balloon mortgage may be a fairly attractive financing vehicle if you are comfortable with the lump-sum payment that will be due at the end of the term. Still, there are many options and features that you should fully understand before selecting this type of program. Please talk to a mortgage professional before selecting any of these special programs.
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