Fixed mortgages give you the security of a steady monthly bill over the life of the loan. This security typically translates into a higher price tag than other loans. However, if you intend to remain in your home for at least seven years, this may be your best option.
Adjustable-rate mortgages typically offer you a low interest rate for a relatively short period of time and once that period is over, the rate floats. If you intend to remain in your home for just a few year's, you can take advantage of this low initial rate. Beware, that while interest rates have been very low, they are on the rise.
An interest-only loan, which allows the buyer to make relatively lower monthly payments at first, applies payments only to the interest. After a certain time, the principal payment is added and the monthly payments rise.
Interest only mortgages are a hot product for homebuyers in markets where prices have skyrocketed because they lower your monthly payments, at least in the beginning of the loan. If your income is low but you expect your income to rise in time to make the higher payment schedule, this may be a good fit for you. It may also be a good choice if you don't plan on living in your home for a very long time.
Other people may prefer an interest-only loan because it frees up cash that can be put to other uses, such as saving or investing. This strategy can pay off, provided you're able to earn a higher return on that money than the rate on your mortgage. With mortgage rates currently in the five to six percent range, that may seem easy. However, while the return you earn by repaying principal on your mortgage is steady, the return on your investments will vary.
Also, keep in mind that with an interest-only loan, you delay building equity in your home. This could become a problem if you are forced to sell your home in a declining market and owe more on your home than it is worth. A common issue right now is that consumers are misusing this loan by buying more house than they can afford.
Piggyback mortgages are designed to get you out of paying mortgage insurance every month. Mortgage insurance, which is not tax deductible, is required when borrowers take out a loan that exceeds 80 percent of their home's purchase price.
Piggyback loans combine a standard first mortgage with a home-equity line of credit. They are two separate loans, the interest you are charged on the second loan will be at a slightly higher rate than the first loan, but it is tax deductible.
A piggyback mortgage can also help you avoid the higher rates associated with jumbo mortgages (anything above $333,700). Jumbo loan interest rates are typically an eighth to a quarter of a percentage point higher than other mortgages. However, on the downside, piggyback mortgages can limit your other borrowing capabilities and your ability to use your home as equity for other loans.
If you are buying an older home or one that needs remodeling, financing for fixer-upper mortgages are a good option because they include the purchase price of the home plus the cost of repairs. These loans are either based on the Fannie Mae Homestyle Program or are Federal Housing Administration Loans (FHA).
The interest rates for these loans are typically about an eighth of a percent higher than other loans. Also, the lender must approve your renovation plans and the contractors you choose to do the work.
This loan typically appeals to people whose cash flow may be erratic because it allows you to skip up to 10 payments over the life of the loan or two mortgage payments annually. However, this flexibility does not come free of charge. Borrowers are charged a few hundred dollars for each missed payment. Also, your missed payments are added to your original loan amount and after each skipped month, a new monthly payment is calculated based on the remaining mortgage term and the original interest rate, raising your remaining monthly payments.