Home Mortgage Lending:
Which Loan is Best?

by Judy Leiser

Home mortgage lending is hot these days, with lower home prices and financing rates. Often, people have questions about which type of residential mortgage loan is best for a new home, refinance or home equity loan, and how to find the best mortgage companies.

It's a little confusing sometimes, when trying to incorporate a second mortgage, and it's hard to determine if the bank or mortgage company is charging you fees that are too high, or if you are asking for the best loan for your current circumstances for mortgage repayments. First time home buyers, too, can find this step in home buying a daunting process. Veterans may want to check for special VA refinance rates, while most of us would begin to shop with mortgage brokers or other lenders.

There are three basic types of residential home loans:
• Fixed rate mortgages
• Adjustable rate morgages
• Balloon mortgages

Fixed-rate mortgages

Fixed-rate mortgages, usually for 15, 20 or 30 years, ensure that your interest rate and monthly payment stays the same during the life of the loan. The shorter the duration of the loan, the higher the payment, but you could save tens of thousands of dollars in interest over the life of the loan by going with a 15-year over a 30-year loan.

In the grand scheme of home mortgage lending, a fixed rate mortgage is best if you plan to stay in your home a long time; if the current interest rate is low when you get your loan; or if you want the certainty of a steady monthly payment. Even if you choose a 30-year loan, it is usually best to prepay as much as you can in the early years of your mortgage, since your regular payment is often 80 to 90% interest at first. Any extra payment on the principal will provide a huge return in later years.

Adjustable rate mortgages

Adjustable rate mortages normally start off lower then fixed rate mortages, but are often adjusted for interest rate changes, so your monthly payments often increase, sometimes several times over the course of the loan.

The adjustable-rate mortgage, or ARM, works well for those who will likely be moving or refinancing in a few years, or those who expect their income to increase in the near future.

Balloon mortgages

A balloon mortgage usually has a similar payment schedule to a 30-year loan, but the loan's remaining principal is normally due in full in five or seven years.

This loan can be risky, and is often used when people are buying bare land, which they later intend to build on, so the balloon mortgage will be rolled over into a new first mortgage on the future home.

Fees and clauses

Watch out for, and avoid, loans that have a prepayment penalty, since you could save thousands of dollars by prepaying your loan. The best mortgage lenders won't include a prepayment penalty in your contract. No matter which type of home mortgage lending you choose, be sure to compare fees and points lenders want to charge for your loan.

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Judy Leiser is a writer for ParadoxPro Home and Garden Site.

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How to avoid foreclosure and keep your home

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