With peak home buying season upon us, and new mortgage loan programs emerging, what do borrowers need to know about navigating the home loan options being made available to them? Many homebuyers aren’t aware of some of the loan options that are open to them. If they would just ask, they would realize that exotic mortgage features are making a comeback. So what designer home mortgage options are right for you, and which might be best avoided?
6 Home Loan Options to Watch:
1. Pre-Payment Penalties
Pre-payment penalties are one of those tricky mortgage loan clauses that can catch homeowners by surprise. They do need to be properly disclosed, but are often conveniently glossed over by mortgage industry workers. Know if your home loan will have a penalty for paying it off early before you sign a mortgage application and real estate closing documents.
Just as importantly, however, is knowing how much it will be. They are not all standard. Some are minimal. Others use multiple pages of industry lingo to disguise massive, six figure penalties. Some reverse mortgages even penalize borrowers by demanding at least half of their home equity appreciation if a loan is paid off.
Pre-payment penalties are always bad. They are tools used by lenders to guarantee a minimum return. Borrowers can often negotiate them down, and choose one or two year penalty terms, after which they won’t be penalized. This can come at the sacrifice or higher mortgage interest rates though. In the reverse, if you know without a shadow of a doubt you won’t sell this property for an extended period of time, you may benefit from electing to take a pre-payment penalty in exchange for a lower rate, or closing costs.
2. Points vs. Interest Rates
Many homebuyers don’t understand the difference between advertised interest rates and the true APR of different loan quotes, or that they can normally negotiate the best combination of points, rates and fees with most mortgage lenders. The APR reflects the true annual percentage rate being levied, including other fees such as points. These factors affect not only the true cost of borrowing over the life of a loan, but the amount of cash required at closing and monthly payments. Ask about modifying this combination to suit your personal needs. For example; you may be able to get a ‘no closing cost’ loan in exchange for a higher rate, or drive down interest rates and monthly payments by paying more points at closing (which may be able to be financed, or paid for by the seller).
3. Interest Only Loans
Interest only mortgage loans may be considered a form of exotic mortgage. They may be a poor choice for many salaried workers who actually want to pay off their mortgages to own their homes free and clear for the long run. However, they can be incredible financial tools for those with uneven incomes, even allowing homes to be paid off earlier. Others use them as speculative tools for holding property with the least debt service while gambling on appreciation and profitable re-sales.
4. Adjustable Rate Mortgages
ARMs are similar to that of interest only loans. Use them with caution. Understand the risks, and worst case scenario potential.
5. Stated Income Loans
Stated income loans are reportedly making a comeback in 2014. The do have an essential role in helping many qualified borrowers buy homes while retaining privacy or enjoying streamlined paperwork. However, using them as ‘liar’s loans’ might be more risk than many ought to consider taking.
6. 20, 15 and 10 Year Loans
Many home buyers could find they are offered even lower mortgage interest rates if they accept shorter loan terms. However, this can mean a higher monthly housing payment and less flexibility. But it does offer structure and forces borrowers to pay off their home mortgages faster. The same goes for balloon mortgages, which can have both great advantages, and serious cons.
