What Kind of Mortgage Financing is Right For You?

The right time to think about how best to finance your new home is when you first make the decision to move. As you’re looking for your dream home, here are some things to keep in mind about popular mortgage loan programs today.

Nothing down, or 100 percent financing

There are tons of programs that let you buy with virtually no money down or cash up front. These are popular because buyers can afford bigger, better homes. But you must proceed with caution. Naturally, you pay more over the life of your mortgage the more you finance.

You also need to plan for the worst when making such a big commitment. If something happens where you can’t pay your mortgage two months after closing, will you have any equity in your new home to either borrow against or cushion the blow of having to sell quickly? You won’t if you put nothing down.

Finally, the more you finance the more susceptible you are to fluctuating property values. Real estate values will go up over time almost without exception. But in the short term, you’re better protected the more of a down payment you can comfortably make.

Adjustable Rate Mortgages and Interest-Only Loans

Adjustable rate mortgages (ARMs) and interest-only loans are very popular today. They let you pay less now and more in one, two or three years (usually). Paying less now and more later is right for some buyers.

But this too has pitfalls. With an interest-only loan, you don’t pay down your principal at first. It’s cheaper, but your monthly payments are going to spike, often drastically, after the interest-only period is up. The same is true, if less dramatically so, with adjustable rate loans.

Be sure you can either afford to pay the adjusted monthly payment down the road, or that you’ll be able to refinance your mortgage again before the payment spikes. Both scenarios involve uncertainty. You need to be comfortable with the level of risk and not just look at your initial monthly payment.

80/20 Mortgages

You may also consider something called an “80/20” mortgage, actually two mortgages – one for 80 percent of the contract price, and a second mortgage for the remaining 20 percent. You’ll sometimes hear this referred to as a “piggyback” loan. Buyers often favor these because they can avoid paying a premium for private mortgage insurance (PMI) and don’t need to make a down payment.

As with other popular mortgages, you should consider the drawbacks, too. You’ll likely pay two sets of closing costs, though that may be less than a down payment plus PMI. And lenders are often very creative when it comes to 80/20 loans, especially the smaller, second one. It will likely have a much higher interest rate, and may reach maturity – that is, you may be responsible for paying the full balance – after only a short time.

Again, be sure you can either afford your future liability or will be able to refinance.

Eric Bramlett currently manages his Austin Real Estate Guide, his Austin Texas Real Estate company’s website, & his Austin Texas Realtor website.