Many homebuyers have turned to what the industry has termed “alternative financing”. While there has been much buzz generated in the media about this, there has been very little information made available to the general public, and what has been provided seems to be an attempt to scare the public, not truly inform them. While this blog cannot cover all the different programs, I will give a brief definition of each program and a basic opinion of each.

The best way to ensure you get the loan that is right for you is to talk in depth with several mortgage loan officers/advisors, and ask enough questions to make sure that you fully understand the loan program you are accepting. Always keep this in mind though: IF IT SEEMS TOO GOOD TO BE TRUE, IT PROBABLY IS!

Several basic types of loans are:

• Fixed rate – The fixed rate is exactly that. The rate is fixed for the term of the loan. Loan terms are typically 10, 15, 20, or 30 years. 40 year terms have recently emerged also. The rates on these loans are typically higher than many of the other loan’s initial rates, and I recommend these loans for customers who plan to live in their home for over 10 years. If you are adverse to risk at all, this is the loan for you.

• ARM – This is an Adjustable Rate Mortgage. Many times there will be an initial fixed term, and then the rate will adjust with market conditions. Typical fixed terms are 6 months, 1, 3, 5, 7, and 10 year fixed terms. After the fixed term, the loan can adjust to varying extents. Each loan will have maximum adjustment caps, and those will be spelled out in your loan documentation. Make sure that you completely understand the adjustments as it usually means that your payment will be going UP. This is ok, as long as you understand and anticipate it. ARM loans usually start out with rates lower than fixed rates, and allow you a smaller payment. The typical homeowner does not stay in their home for 30 years, in fact many move within 3-5 years. Know what your plan is before deciding which loan is right for you.

• Interest only – The interest only loan is just that – you only pay the interest on the loan. Typically this loan has a set term and then will re-cast the fully amortized payment over the remaining term. Typical interest only terms are 5 or 10 years, so make sure you understand the details. Many of these loans are a combination of an adjustable rate, and interest only. If you are not careful, this could cause a large increase in payment when the loan rate adjusts, and the interest only term expires and you must pay a higher rate and a fully amortized rate. This type of loan is great though for customers who keep it for less than the fixed and interest only term as the payment is significantly lower than a normal loan!

• HELOC – A Home Equity Line of Credit is typically a second mortgage, but there have recently been several 1st mortgages introduced. These are loans that have the availability to continue taking money out after the loan closes, similar to a credit card. The homeowner is given a checkbook, or sometimes a debit card and whatever withdrawals are made are added to the loan balance. These can either be fixed rate or adjustable, depending on the loan program selected. Payments go up or down based on the balance of the loan. For homeowners wanting to be able to tap the equity in their home without going through the loan process time after time, this may be the program for you.

• Option Arm, MTA, COFI, etc – These loans are also referred to as a potential “negative amortization” loan. These loans have a VERY LOW initial rate that the payment is based on, however the actual rate is higher. If the minimum payment is made, there will be an amount of interest that is not covered and it will be added on to the back of the loan, raising your loan balance. These loans usually have a fixed payment for 1 to 5 years, however the interest rate is usually not fixed, and in the current market, has been adjusting up. This increases the amount of interest owed, and the unpaid interest is added to your loan balance. If that balance reaches a preset level, usually 115% or 125% of the original loan balance, the loan is then switched to a normal loan, and the homeowner will now be expected to make full payments based on the whole loan amount – your payment would go WAY up!

Loans with multi option payments are best for people who first fully understand ALL of the options, and ramifications. People with commissioned incomes that vary widely are good options, as are investors. Those who will be keeping the loan for only a short amount of time can use this very effectively as well. In my opinion, this loan should never be used simply to buy more home than you can really afford. At some point you have to pay the piper!

This is truly an exciting time for the mortgage industry, with more options for homeowners for financing than ever before! Mortgage brokers typically offer more options than a bank, and can help tailor a product to your needs. As with any industry, do your homework, make sure you trust the person you are working with, and that you fully understand the mortgage product you select. If you don’t understand your loan, it probably isn’t for you!