 |
Additional
Types of Mortgages |
Within the broader mortgage
categories of fixed and adjustable-rate, there are plenty
of other variations, such as COFI, Hybrid, and Balloon loans,
several of which combine aspects of the two main types. Let's
take a look.
COFI, Anyone?
One type of ARM is a COFI loan. COFI stands for "cost
of funds index." This loan doesn't have any caps, and
adjusts monthly. It is, in a sense, the most adjustable ARM
of all, since it isn't fixed for a certain time. But, the
index to which it is tied is, in many ways, the most stable
index of them all: It is tied to the rate that banks have
to pay their depositors to keep their money (i.e., checking
accounts, savings accounts, certificates of deposit). It tends
to be a slow-moving index. The COFI loan has certain advantages
in that you can vary the amount of your payments as you wish
(paying off more or less each month). If this suits your temperament
and your budget, inquire about it since it is often not brought
up as an option.
Hybrid Loan
Just as in a candy store, why have two flavors when we can
have a mix and make three? Sure, your hands might get sticky
and your tongue can turn green, but we like freedom of choice.
Typically a hybrid loan is fixed for 1, 3, 5, 7, or 10 years
and then converts to an ARM. This means you get stability
for a given amount of time, and then your fate is cast to
the winds of the prevailing interest rates. If you imagine
a fixed-rate mortgage as a motorboat, and an ARM as a sailboat,
then you get to run the ship under its own engines for a time
before you unfurl those sails and hope for favorable winds.
Two-Step Loans
These loans attempt to provide the best of both worlds: the
stability of a fixed loan with the lower rates of an ARM.
They appear in their most common forms as 5/25 or 7/23 loans.
Math buffs among you will note that the numbers straddling
those slashes add up to 30, as in a 30-year loan. This means
that your interest rate will be fixed for the first five or
seven years, then the loan adjusts in one of two ways: It
will either become an ARM, adjusting annually, or a fixed-rate
loan. The beginning interest rate for these loans is generally
lower than that of a standard 30-year fixed loan.
Balloon Loans
These tend to be short-term loans. You borrow money for, say,
three or seven years, and the loan is amortized as though
it were a 30-year loan. At the end of the three- or seven-year
period, you owe the bank all of the remaining principal, in
one lump sum -- like a big balloon. Again, these loans tend
to have lower interest rates than the standard 30-year mortgage.
If you're not planning to stay too long in your house, you
might be interested in such a loan. The reasoning goes like
this: You pay less in interest over the course of the loan
than you would with a 30-year fixed loan -- saving potentially
thousands of dollars. So, you're less out-of-pocket when it
comes time to sell.
Keep in mind, though, that if for some reason your plans change
and you want to stay in the house, you're going to have to
pay off the loan in full -- by getting another loan, at the
prevailing interest rates and with the attendant costs of
getting that new loan. So, it isn't for the faint of heart
or irresolute of mind.
Regardless of what type of mortgage you're interested in,
you also need to figure out where you'll get it from: a bank
or a mortgage broker. |
|
|
|
