Compare Your Non-Conventional Mortgage Options

Thinking of applying for a mortgage that’s not the conventional, 30-year, fixed-rate model? If you do so, you’re taking a risk.

However, some areas practically require that risk due to staggeringly high home prices - and when properly managed, you can make it work without going the route of a conventional mortgage.

Below is a brief comparison of several mortgage products providing the prospective borrower with lower monthly payments and more borrowing power than standard 30-year, fixed-rate mortgages. But as we said above, those benefits require trade-offs.

Fixed-period, adjustable-rate mortgage (ARM):

This type of adjustable rate mortgage maintains the same initial interest rate for the first 3, 5, 7 or 10 years of your loan, depending on the term you choose. Your interest rate then will adjust annually, and can move up or down as market conditions fluctuate.

The trade-off: If you can’t get approved for a mortgage refinance or sell at the end of the fixed period, you could be in for higher interest rates - and higher payments.

Interest-only mortgage:

Under the terms of this increasingly common product, the borrower pays only the interest on the home loan amount - not the principal - plus property taxes and insurance in the early years of the loan term.

The trade-off: No reduction in principal means you’re not building any equity. Your home equity is the difference between the amount owed on the property and what it would sell for on the open market. Building it is the biggest reason to own a home, so if you’re not, hopefully you know what you’re doing.

Balloon mortgage:

The balloon mortgage is a product that is a fixed-rate mortgage with a term of seven years, but the principal and interest are calculated for a 30-year term.

The trade-off: If you can’t pay off the loan at the end of the balloon period, you aren’t guaranteed refinancing.

Option ARM:

An adjustable-rate mortgage in which you choose from among several payment options each month. Typically there are four monthly payment options. The biggest payment is on a 15-year pay-off schedule, a smaller payment on a 30-year schedule, and an even smaller interest-only mortgage payment.

The trade-off: Option ARMs often carry a prepayment penalty that will make it costly to refinance or pay off the loan early. Any penalty assessed to mortgage prepayments is a definite red flag. Be advised, and ask about this. Also, any unpaid principal resulting from option four is added back into the loan.

SOURCE: Philadelphia Daily News