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Alternative Loan Types Are Still
Available, But Choose Wisely
Despite the almost daily hand wringing over
the rise in foreclosures, alternative loans—such as interest-only loans
and other similar adjustable-rate mortgages—are still available as an
option from most lenders. Even though the sub-prime crisis has often
been linked to such adjustable loans, the truth is that ARM’s are good
options in some cases.
Of course, adjustable-rate loans certainly
aren’t for everyone, but an adjustable-rate mortgage may be a viable
solution for some borrowers.
But be forewarned: If you do decide on an
ARM, choose wisely and know what you’re getting into before you take on
that mortgage.
When deciding between a fixed-rate mortgage
and an ARM, you’ll need to look carefully at each loan’s pros and cons.
With a fixed-rate loan, a borrower will have a set payment each month
for the life of the loan and will not have to worry about future
interest rate increases. However, peace of mind will cost more as
fixed-rate loans do have higher rates. In contrast, adjustable-rate
mortgages have lower initial rates, but will adjust upwards after a set
period of time—usually three or five years—depending on the type of
loan.
So when is an ARM a good option? Usually, an
ARM may be a good choice in one of two scenarios: One, if you don’t plan
to be in your home for a long time (say 10 years or less) or two, if you
expect an above-average increase in your income in the near future. If
you’re not going to be in your home for a long time, an ARM can be a
smart short-term solution because it will function as a fixed-rate loan
at a less expensive rate and you won’t need to worry about the loan
resetting—as long as you no longer have that loan when the initial rate
period ends. As for an increase in income, if you know you’ll be able to
afford the higher payments when your loan adjusts—even if interest rates
rise—an adjustable-rate mortgage might be a good money-saving tool.
However, if you’re not 100% sure that you
won’t be in your home for a long time or 100% sure that your income will
be increasing, a fixed-rate loan may be a wiser choice. Also, keep in
mind that you’ll need to have good credit to qualify for many types of
adjustable-rate loan products and many lenders will require a larger
down payment.
In the end, not matter which type of loan
you’re leaning towards, you’ll definitely need to talk to your mortgage
professional to see what kind of mortgage is right for you and your
situation. ∆ |
