| Have you been considering getting yourself a hybrid? No, not a car that runs on gasoline and batteries… instead, a mortgage that is unusual: one that allows you to take your buying power further. Most borrowers look at two basic loan programs: a fixed-rate mortgage or an adjustable rate mortgage. The only difference between the two types of loans is how the interest is attached to the loan, either a steady interest rate or a sliding rate that adjusts with the national prime. Hybrid loans often have more relaxed standards than traditional lending programs. There are a variety of loan programs that fall under the hybrid label. Piggy-back Loans Piggy-back loans allow borrowers to buy a home with either a very small down payment, or save money by forgoing private mortgage insurance (PMI). With this program, two loans are taken at the same time. A first mortgage which covers 80% of the home value and a second mortgage that covers the rest of the home value (usually between 5 and 15%). This type of loan program is great because it allows you to have a lower combined monthly payment than you would with a traditional loan program. Convertible ARMs An ARM is an adjustable rate mortgage. Many people hesitate to take an ARM because of concerns that increases to the national prime rate will drive their interest rate and monthly payment above what they can afford. With a convertible ARM, you can covert from an adjustable to a fixed rate when rates begin to climb. Sometimes you will have to pay a fee to convert the loan, but it is still less than the overall interest increase. Two-step Mortgages Another option for an ARM is to have a loan that adjusts only once, at a specific point in time. For instance, the rate will often change either at 5 or 7 years into the loan. There is usually a ceiling which limits how much the interest can increase based on the initial rate, although the rate can drop if the market rate decreases. There are even more loan programs available, options that allow you to make additional periodic payments, sometimes called balloon payments or graduated payments. This type of loan allows you to have a regular monthly payment, and then make a periodic extra payment. These loans work for people that expect their incomes to increase, but they can sometimes be dangerous for owners whose income does not increase as expected. Your best bet is to discuss all your options with a mortgage expert, someone who can point out potential problems with any mortgage program. Carefully weigh all the pros and cons before committing to any mortgage and you will find a loan that takes you further than you expected. |
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