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In response
to consumer demands over the years, the mortgage industry has come
up with many alternative loan programs designed to fill particular
needs that the more straightforward fixed rate loans and normal
adjustable rate mortgages (ARMs) don't address. Many of these loans
have more liberal qualifying standards than traditional loans. These
"hybrid" loans include:
piggy-back
loans
These
loans allow people to buy a home with smaller down payments and/or
to avoid private mortgage insurance (PMI). Two loans are approved
concurrently: a first mortgage which is normally 80 percent of the
value of the property and a second mortgage equal to 10-15 percent
of the value, with your down payment making up the difference. The
benefit is that your overall monthly payment will likely be less
than getting a 90 percent or 95 percent LTV loan with PMI.
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convertible
ARMs
Some
ARMs give you the option to later convert to a fixed rate. This
option alleviates some of the risk of fluctuating interest rates,
but remember that converting to a fixed rate usually requires a
fee … and that fixed rate will probably be higher than standard
fixed rates at the time of conversion.
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two-step
mortgages
Some lenders offer this specialized ARM which adjusts only once,
at either 5 or 7 years. After that adjustment, the rate remains
fixed for the remainder of the loan. The new rate will never be
more than 6 percentage points higher than your initial rate, but
the rate can drop as much as the market may. This option is a little
bit like a fixed rate loan with an automatic refinance built in.
You take the risk that rates might increase before the adjustment
date, but this option gives you the advantage of a lower initial
rate than a fixed rate mortgage could offer.
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convertible
loans
Another option somewhere between fixed and adjustable rate mortgages
is convertible loans. These loans act like fixed rate loans during
the first 3, 5 or 7 years, though with a generally lower interest
rate, and then become adjustable rate mortgages. This type of financing
might be a good idea if you expect your income to increase, or if
you think interest rates will fall during the first phase of your
loan.
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balloon
mortgages
These are short-term fixed-rate loans that begin with low, fixed
payments and end with a single large payment for all remaining principal
at the end of 5, 7 or 10 years. A balloon mortgage might be a good
idea if you only plan to live in your home for a few years, and
want to keep your housing costs low. But it can be quite difficult
to save up for the final balloon payment while making interest payments
on the loan. If you plan to remain in your house, you will probably
have to refinance before the final payment comes due.
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graduated
payment mortgage (GPM)
These loans offer smaller payments at the beginning which rise regularly
and level off after about 5 years. A GPM might make sense for buyers
who expect their income to rise significantly in the next few years,
but think carefully about this loan. Since early payments are applied
only to interest, negative amortization can occur, and the loan
principal might actually increase.
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other
mortgage options
Government-insured mortgages like VA and FHA loans are designed
to help make home ownership affordable for veterans, first-time
buyers and people with low to middle incomes. These loans offer
eligible buyers flexible qualifying guidelines and highly competitive
rates with little or no down payment.
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