Home Ownership, American Dream or Pipe Dream?
In your mind the arched doorways of your perfect Spanish villa are ready to go and who cares if they stick out like a sore thumb among the boxy, sensible, functional, homes of your any-town-USA neighborhood. You’ve worked out how you’ll install an open-air courtyard right at the center of your cottage, refusing to let the bone chilling winds that swirl seven months out of the year get the better of your sun-filled fantasy.
And then it hits you like a ton of bricks. Dang. You’re going to have to fund this little dream. For the few lucky ones, it’s a matter of making a call to the bank. For the rest of us – there’s a mortgage.
Talking a Big Game: What do You Really Know About ‘Alternative’ Mortgage Lenders?
Five years ago it seemed that banks were taking a major hit from alternative lenders fast eating up an ever expanding piece of the mortgage loans industry. But as quickly as the new players’ star was rising, concerns about the breadth of options they offer and the credibility they bid started rearing.
While veteran lenders such as SoFi and LendingTree had it easy, building on a trusted reputation from their personal loans offerings they managed to ride this wave mostly unscathed, it was newcomers like Rate Marketplace that found themselves desperately trying to prove their integrity to mistrusting onlookers.
Fast forward to right now and the burden of doubt just fell in your lap.
You don’t want to be a sitting duck, wondering if the next lender you consult will feed you big dreams with little cover, but if you had the time to research high and low you wouldn’t be the Worry Wart that you are, reading this article for support.
So what’s a borrower to do?
Simply, when in Rome do as the Romans do.
Lean their language. Talk their talk. Make sure the next lender you approach doesn’t talk at you but with you.
That is what this guide is for. To talk shop; relay the leading mortgage types, break down the all mighty interest rates enigma, putting the power of knowledge behind you.
No Pain No Gain; Adjustable Rate Mortgage
Adjustable rate mortgage, also known as a “floating” mortgage, is not for the faint of heart. But if you don’t mind the nail-biting wait to find out what you’ll be paying each month, this loan option holds the promise of potential dips in interest rates, spelling out S-A-V-I-N-G-S for you.
As with any financial practice, no pain no gain is the motto here too. If you’re willing to risk it there’s some significant savings to be had. But if you need to plan ahead, knowing exactly what you’ll be shelling out each month, then committing to an adjustable rate mortgage is probably not for you.
For profiling purposes and with the disclaimer that not all borrowers were created equal, the rule of thumb here has to do with profession and employment stability. If you’ve hopped between jobs several times over the past few years, are allergic to the idea of being married to a single employer, your financial history reads like the choppy waters of the Atlantic, or your nerves don’t respond well to uncertainly, chances are you are a poor candidate for an adjustable rate mortgage.
In a couple of words, this mortgage type works best for: Bravehearts.
Fixed Rates for Sound Sleepers
Let’s briefly travel back to decades past.
In happier times known as the 1920s, when booze flowed and girls where loose, the leading mortgage type was the “floating” mortgage. Then came the crash of Wall Street in 1929 and Americans fast realized that not everyone was cut out to be Gatsby (wealth aside, there’s a grim ending there too, but we’ll leave that to the lit. experts to dissect). True to its name, the floating mortgage reigned supreme in a time when finances where an afterthought and a stable income was something of a joke.
For international onlookers it may seem we’ve recovered from the recession and we’re long past the collapse of the housing bubble. But Americans trying to make it to their dream home (or a home) in this economy, know better.
In the past 20 years the leading mortgage type has been the fixed rate mortgage, signaling a spirit of caution and maturity. In keeping with this conviction, fixed rate mortgages are ideal for homeowners looking to settle down in a forever home. The fixed rate of the loan will remain in place throughout the entire loan term, thereby affording a consistent payment amount each month. And while there’s no promise of savings here, the good news is you’re still allowed some wiggle room when it comes to the loan term.
Running the gamut between 15 and +30 years, loan duration will depend on your monthly repayment capacity. If you've recently acquired a high-paying job or are looking to pay off your home as quickly as possible, you may want to consider a 15 year fixed mortgage. But if a quick payoff stands to suck you dry in monthly returns, it’s probably wise to secure a lender that’ll allow you to spread out your loan over 30 plus years.
In a couple of words, this mortgage type works best for: Light Treaders.
Rolling Out the Red Carpet for Visionaries; Interest-Only Mortgage
Sometimes, the home of your dreams may come on the market, but you can't quite afford the monthly payments just yet. If you anticipate the ability to afford the house in the future, you can take out a mortgage with an interest-only payment option. During the first 3 to 5 years of the loan, your monthly payments will only consist of the interest payments. This means that the payments will be low, allowing you to save up money and plan for larger payments in the future. Once the interest period is up, you will return to standard mortgage payments on your home.
In a couple of words, this mortgage type works best for: Cautious Optimists.
Touch-and-Go Times Call for Balloon Loans
A balloon payment is similar to a 30-year fixed rate mortgage for the first 5 to 7 years. This means you will have traditional payments and interest rates that remain the same for said amount of years. Once this set period transpires, the remaining balance of your home is due; full principal and the interest too.
Paying this off will give you complete ownership of your home.
So why not take a regular fixed mortgage and pay it off all at once when I am able to? Simply, a balloon loan exempts you from the penalty fees associated with early returns on standard 15-30 year fixed rate mortgages. While most fixed rate mortgages do allow full payment before term, you will be subject to high penalty fees easily avoided if you know if advance that you will be able to pay off your loan within a few years.
If you anticipate coming into large sums of money in the foreseeable future, either through winnings, settlements or an inheritance, you may find the balloon mortgage ideal.
In three words, this mortgage type works best for: The lucky ones.
It would be pointless advice to say ‘don’t listen to the forecasts’, so I’ll just encourage you to take forecasts with a grain of salt. Case in point: rates have been on the down slide so far in 2016, startling the pleasantly affordable 3.5% to 4.25%, and not looking to dial till early next year. These are the lowest rates we’ve seen in three years. But chances are that if you’ve been listening to late 2015 promises of a dramatic surge in rates, you have steered clear of a mortgage and these favorable numbers have just passed you by.
So what’s affecting the forecasts and why are they fallible at best? For one, it’s a matter of the indicators they look at and the ones they pencil out of the equation. To drive political benefits this way and that, late 2016 forecasts will talk avidly about the effects of the upcoming elections on rates going up, claiming they are likely to go past the 4.5% mark. An equally digestible fall-boy will be China’s banking crisis, with claims of a global chain reaction resulting in a massive surge in mortgage rates.
In reality, domestic politics and international affairs have far less power over rates and certainly not an immediate one.
Holding less political capital and far less sexy to vocally agonize over, are the gross domestic product and home sales and starts prices. Sometimes little known to the average mortgage applicant, these financial indicators will shape your return rates and determine the quality of your mortgage far more dramatically and immediately than any of the large-scale indicators making up the forecasts.
Bottom Line: Dangerous is Only Cool When You’re in High School
You’ve worked out your budget. Twice.
You’ve defined how much you can borrow and stretched that as much as you possibly could.
But the numbers still don’t add up to your dream home.
The forecasts are not your enemy here, favorable or hostile, I’ve deemed them unreliable. The lenders are not your enemy either, even if they try to sway you to bite off more than you can chew. Your overreaching ambitions, on the other hand, may well be.
A word to the wise, then.
Don’t be reckless. Overzealous. Arrogant.
Remember what happened to Icarus.
Be cautiously ambitious.
The rest is just a mortgage loan.
If you want to learn more about the best mortgage loans and lenders, read our in-depth, expert reviews.