The mortgage market is
much more diverse than some borrowers think.
Besides the standard fixed-rate and adjustable-rate
mortgages, there are other types of mortgages and
ways to finance a home.
These are mortgages that combine elements of fixed
and adjustable-rate mortgages. They go by confusing
names such as 2/28, 5/25 or 7/23. A two-step
mortgage features a fixed rate and payment for an
initial period, followed by one adjustment, then a
fixed rate and payment for the remainder of the loan
term. A 7/23, for example, has an initial fixed
period of seven years, an adjustment, and then 23
more years of payments following the adjustment.
Pro: Opportunity for
damaged-credit borrowers to buy homes and to
establish better credit.
Con: If your credit
does not improve, you could be stuck in a high-rate
loan for much
than two or three years.
This is a fixed-rate mortgage in which payments are
made every other week, instead of monthly.
Typically, it is a method used to shorten the life
of a 30-year mortgage. Here's how it works: You take
your monthly payment amount, divide it by two, and
then pay that amount every two weeks. That means you
will be paying 26 "half-payments" a year -- the
equivalent of 13 monthly payments, with the 13th
monthly payment applied entirely to the principal
balance. This simple device has a dramatic impact on
the length of the loan -- a 30-year loan can be paid
off in about 23 years through this method. The only
tricky part of changing to a biweekly mortgage is in
making sure your lender accepts your payments and
correctly credits the extra portion to principal.
Pro: Good budgeting
tool for people paid biweekly.
flexibility if an unforeseen financial problem
arises because payments
must be made so close together.
With these, borrowers get lower rates and payments
for a specific period of time, which usually is
anywhere from three years to 10 years. At that
point, a borrower has to pay off the principal
balance in a lump sum. Under certain conditions, the
mortgages can be converted to fixed-rate or
adjustable-rate loans. Many borrowers either sell
their homes before they get to their due dates or
end up refinancing their balances into new
Pro: Save on
mortgage costs initially -- a great option if you
don't plan on living in the
Con: Plans sometimes
change. Will have to pay off or refinance balance,
with time, effort and more closing costs.
Assumable mortgages are relatively rare. A homeowner
with an assumable loan can "hand off" the loan to a
buyer instead of paying it off using proceeds from
the home sale. If rates are low and you can get one,
by all means do so. If rates rise, buyers will want
to assume your loan (and will be willing to pay more
for your house!) because it'll be much cheaper than
any loan they could get from a bank or other source.
monthly payments and saves money on closing costs.
charge more for houses, so buyers need more cash to
the difference between asking price and loan
These days, even people with less-than-stellar
credit can buy homes -- as long as they're willing
to pay up for so-called subprime mortgages. These
loans have higher rates and more onerous terms than
conventional loans, but they can help bruised-credit
borrowers reap the benefits of homeownership just
like their more creditworthy cousins.
Opportunity for those who can't prove income, have
low credit scores, bankruptcies, too much credit or
need a higher-than-normal loan-to-value ratio on property.
consistency. Rates, fees and underwriting guidelines
vary drastically. Borrowers need to shop more to find best rate.
These loans help people who want to build homes,
rather than buy existing ones. They typically
feature a two-step borrowing process. Borrowers pay
higher rates for the duration of construction,
during which time they draw money to pay their
builders. Then, they go through a second closing at
which time the loan usually converts to a
traditional, long-term fixed-rate structure.
This is an agreement where the seller of the home
provides financing to the buyer. The buyer makes
monthly payments to the seller instead of the bank.
The promissory note is secured by the property. This
type of financing often includes an assumable