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Choosing a mortgage - knowing your options
Most people assume they'll get a conventional 30-year, fixed-rate loan and overlook many other options.
With more competition in the marketplace in recent years, you can choose from an increasing variety of loans, and may find another that better matches your long-term plans and goals. For example, if you think you may change jobs within three years, you may be better off getting an adjustable-rate mortgage. An adjustable-rate loan has a low interest rate in the early years of the loan, while a fixed-rate loan stays constant at a higher rate. With an adjustable, you'll pay less for short-term ownership of your house. On the other hand, if you think you may keep the house more than 5 years, a predictable fixed-rate loan is probably a better choice. Here are some things to consider when making your decision:
Think Ahead
Seriously consider your future plans and then look for a loan that conforms with them:
Do you want to remain in the area?
If you like the area where you live now and don't think you'll buy a bigger, smaller or better house soon, then get a loan with the best rate for the long term.
Are you happy with your job or confident you won't change jobs soon?
If not, you may want to invest in a property with good resale value and a loan that ties up a minimal portion of your income.
Do you plan to make any family changes?
If you plan to have children or your widowed mother is going to move in, your current house may not be large enough. You may want a loan that keeps enough capital free to make the necessary additions. You can also prepay principal to build up additional equity and draw a home-equity loan or refinance your current loan and get cash out.
Will you finance your children's college in the next 10 years?
You may want to choose a 15-year loan to build up equity sooner and pay a lower interest rate. Or pay down (pay more principal on) a longer-term loan to free more equity before you take on that expense.
What are your long-term financial goals?
A mortgage is a form of fixed savings, and you get a payback in the form of a mortgage interest deduction, but you may need to invest more cash in areas that have a bigger return. You'll shortchange your retirement savings plan if you put the bulk of your resources into a home loan.
The Portfolio Advantage
Portfolio lenders are lending institutions that don't resell their loans on the secondary mortgage market. They can be more flexible about loan terms and qualifications because they don't have to follow secondary-market rules. It's harder to qualify for loans intended for sale, because they must conform to rigid guidelines. For example, Freddie Mac and Fannie Mae won't permit all of the down payment to be a gift if the borrower is applying for a 90 percent loan, but some portfolio lenders will. A portfolio lender may also:
Stretch your qualifying ratios
This can be most valuable if your income is shy of the required amount for a Freddie Mac or Fannie Mae loan. Your qualifying ratio is determined by dividing your monthly housing expense (the total of your loan payment, property taxes, hazard insurance, mortgage insurance and homeowner association fees) by your gross monthly income. For a Freddie Mac or Fannie Mae loan, this ratio shouldn't exceed 30 to 33 percent. A portfolio lender may allow a 40, 50 or even 60 percent ratio, depending on your credit rating and the amount of cash you have to put down.
Fund a loan for an "as is" property
In fact, a portfolio lender may be your only option. Properties sold "as is" almost always need major work. Some portfolio lenders will allow funds from the seller's proceeds to be held in an account to complete repair work after closing. Freddie Mac and Fannie Mae loans won't permit holdbacks for such work.
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