Which Loan Is Right for Me?

Years You Plan to Live in the House Recommended Program
1-3 3/1 ARM, 1-year ARM, 6-month ARM
3-5 5/1 ARM
5-7 7/1 ARM
7-10 10/1 ARM, 30-year fixed or 15-year fixed
10+ 30-year fixed or 15-year fixed
Loan Programs Advantages Disadvantages

Fixed Rate Mortgages
30 year fixed 15 year fixed

Monthly payments are fixed over life of the loan

Interest rate does not change

Protected if rates go up

Can refinance if rates go down

Higher interest rate

Higher mortgage payments

Rate does not drop if interest rates improve

Adjustable Rate Mortgages
10/1 ARM 7/1 ARM
3/1 ARM 1 year ARM 6 month
ARM 1 month ARM

Lower initial monthly payment

Lower payment over a shorter period of time

Rates and payments may go down if rates improve

May qualify for higher loan amounts

More risk

Payments may change over time

Potential for high payments if rates go up

Balloon Mortgages
7 year 5 year

Lower initial monthly payment

Lower payment over a shorter period of time

Many balloon mortgages offer the option to convert to a new loan after the initial term

Risk of rates being higher at the end of the initial fixed period

Risk of foreclosure if you cannot make balloon payment or if you cannot refinance or if you cannot exercise the conversion option

First-Time Buyer Programs

Lower down payment

Easier to qualify

Sometimes you may get lower rates

May be subject to income and property value limitations

Some programs which have government subsidies may have a recapture tax if you sell the house too early.

Interest Only Mortgages

Good for people who expect to make a lot more money in the near future

Lower payments during interest-only period

Helps you qualify for a larger loan amount and maybe a larger home

More risk

Anticipated income growth may not happen

Greatly increased monthly payments at end of interest-only period

If home values decrease, your mortgage may be greater than the value of your home

Stated Income Programs

Don't need to verify income

Faster approval

Higher rates

Higher payments

Imperfect Credit Programs

Potential to re-establish credit if you pay your mortgage on time

When used for debt consolidation, you may be able to reduce your monthly debt payments

Higher rates

Terms may not be as favorable

Harder to get long-term fixed loans

Loans may have prepayment penalties

Home Equity Line of Credit

You only borrow what you need

Pay interest only on what you borrow

Flexible access to funds

Interest may be tax deductible

Rates can change. The maximum interest rate is normally high

Payments can change

Harder to finance your first mortgage

Home Equity Fixed Loan

Fixed payments

Interest may be tax deductible

Higher interest rates than on 1st mortgages

Harder to refinance your first mortgage

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