Which Loan?

Which loan product is best for me?

The "best" loan for you will depend on your current and future financial situation and your plans. For example, if your job requires that you move every few years, a 30-year loan may not be the best product. In the first years of a long-term commitment like a 30- year mortgage very little money, if any, goes against the principle. Most of it goes to paying interest.

In another case, if you are somewhat strained by the financial commitment today, but you expect things to get better as time goes on, you might opt for an adjustable loan which could give you 1, 3, 5, or 7 years of low payments before it starts to creep up (or down), depending on the 30 year treasury bond rates.

Let's look at some of the more common loan products available:

30-year fixed, 15-year Fixed Mortgages:

These mortgages start at a set interest rate and remain at that rate for the entire term of the mortgage. They make sense if you intend to stay in a home ten years or longer. If not, you may want to investigate other mortgage products.

1, 3 & 5-year Adjustable Rate Mortgages (ARMs):

ARMs today have interest caps making them safer and more manageable. These ARMs are often tied to the performance of the 30-year T-Bill. Rate can be adjusted upwards or downwards annually--usually no more than 2 points and 6 points maximum over the life of the loan. If you watch 30-year Treasury Bills over a period of months, or years, you won't see it change much. This performance, and the rate caps, are the primary reasons ARMs are safer than they used to be.

The risk of ARMs became apparent in the 2008 financial meltdown as ever increasing sub-prime mortgages went into default as consumers could not make the payments once they adjusted. If you do decide to go with an adjustable rate, be sure to utilize a credit repair service to increase your credit scores well before your loan is due to adjust. If you repair and rebuild your credit during that pre-adjustment period, then you will be in a position to refinance at the prevailing best rate.

5/25 and 7/23 (30 year) Fixed Rate Mortgages:

The first 5 or 7 years is fixed, the mortgage interest rate adjusts annually thereafter.

Balloon Notes:

Most 5/25 or 7/23 products are also available as balloon notes. Balloon notes mean lower up front payments and usually allow the borrower to renew after the initial period (5 or 7 years), if the borrower has made timely payments. The balloon note may also contain additional restrictions.

No Income/No Asset--Low Documentation Loans:

People with clean credit and a cash lifestyle use No Income/No Asset loans. The higher the down payment, the more likely this type of loan will be approved. These loans require little or none of the normal loan documentation. They also come with slightly higher interest rates to compensate for the risk.

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