How To Choose a Loan

Are you buying your first home? Maybe you're planning to retire soon, buying a second home or planning on an owner occupied investment property. Real estate loans are not one-size-fits-all. How do you find the right loan?

As with all major expenditures you should first assess your life situation both for the present and for possible future life changes. Are the kids just starting school, leaving for college, do you foresee a job transfer? How much of a down payment can you make, do you want the security of a fixed rate payment, what about cash flow?

1. A fixed rate loan can provide you the security of an unchanging fully amortized payment. The typical term of the loan is 30 years. This type of loan usually works out best for those who plan to stay in their home for the long-term.

   There are variations to the 30 year loan. A 15 year payment term allows you to pay less interest for the life of the loan, you could save hundreds of thousands of dollars in interest paid over the life of the loan, but you will be making larger payments.

   If you're not comfortable with larger payments you can still save money paid in interest over the term of the loan and shorten the life of the loan by several years. Simply divide your monthly payment by 12 and add that amount to each monthly payment making 13 payments instead of 12 for the year.

   Choosing a 40 year term will give you a smaller monthly payment but you will also build equity more slowly and pay more in interest during the loan's term.

   A multi-year fixed rate loan with a balloon payment offers lower payments and usually has lower closing costs. You will definitely want to refinance the loan prior to the balloon payment due date though!

2. Choose a buydown loan if you feel the need to ease into making full payments. You may be able to temporarily buy down the interest rate for the first two or three years of the loan. For example, the first year you might pay 3% interest, the second year 4%, the third year 5% and finally the full 6% the fourth year and from then on for the life of the loan. These loans are fully amortized. Be aware that lenders charge you up front for this option.
3. Interest only loans provide a smaller fixed monthly payment to begin with, making payments of only interest with no principal amount included. The loan then resets, usually at the end of a five or ten year period, to cover both principal and interest for the remaining 20 or 25 years of the loan term. These loans are also amortized over the full term of the loan.

   Interest only loans are also available at adjustable rates. Ask about the adjustable rate reset periods and interest rate caps.

4. Are you a teacher, police officer, firefighter or health care worker? You may qualify for a loan under a special program that features a lower down payment or no down payment at all with an interest rate at or below the current market. The credit, lending and underwriting guidelines are also more flexible for these loans.
5. Government loans such as those insured by the FHA have lower down payment requirements and are usually easier to qualify for than a conventional loan for those with lower incomes. Sometimes this type of loan is also available from city or county governments.
6. Reverse Mortgages can present options for older Americans. If you've celebrated you 62nd birthday a reverse mortgage cannot only be used as a financial management and retirement planning tool but can also help you purchase a second home or become a foreclosure option. And you will not have to make payments!

Don't let anyone pressure you into a loan that's not right for you. Shop around, ask questions and explore your options.