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Adjustable Rate Mortgages
Adjustable rate mortgages, or ARMs, have become increasingly popular over the last few years because they start with an attractive, lower fixed-rate, and after an initial period, they adjust according to a specified index. They can look confusing, what with the 3/1, 5/1, 7/1, 10/1 and a handful of other options. But they're easy to read. The first number indicates how many years your interest rate is fixed; the second number indicates how often the rate adjusts after the initial period is over. For example, in a 5/1 ARM, your interest rate stays the same for the first 5 years, and then adjust every year after that, up to a cap that you and your lender agree on.
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The downfall of these low-rate wonders? After your initial fixed-rate period is over, if interest rates rise, so does your monthly payment. If you can live with that, or if you expect to move in the next few years, then an ARM can save you money over the short term.
Interest-Only Mortgages
Another increasingly popular mortgage option is an interest-only mortgage. This type of mortgage is best for people whose income comes from infrequent commissions or bonuses, or for those who expect to earn a lot of money over the next few years. With interest-only loans, you pay only the interest on your mortgage for a fixed period of time( usually 5 to 7 years). At the end of this period, you can refinance, pay off the mortgage in a lump sum, or start paying off principle (in addition to your interest payment).
Balloon Mortgages
These mortgages are similar to an ARM, in that you get a low initial interest rate, but after a set number of years - usually 5 or 7 - the
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mortgage ends and you have to either pay off the remainder (with a "balloon" payment, hence the name) or reset the mortgage at current interest rates. Payments are amortized over 30 years at an interest rate that's typically lower than a fixed-rate mortgage, so if you plan to move before the balloon maturity date you can usually save money. But if you plan on staying put, and interest rates rise dramatically over the next few years, your payments after a reset could increase substantially as well.
Low-Doc / No-Doc Mortgages
If you are self-employed or have bad credit but a lot of cash, a low-doc or no-doc mortgage is a good options. When considering you for a low-doc mortgage, lenders typically look for two of three requirements: assets, income and credit. If you meet two of the three, for the price of a slightly higher interest rate you can get easy mortgage approval without having to provide a lengthy financial history.
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