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Both the fixed- and variable-rate loan categories encompass a wide variety of products. Here’s some of what’s available:
- Buydowns. A seller, builder or buyer can offer to make a lump-sum payment
at the beginning of the loan that will be used to subsidize the monthly
payments for the first few years. It’s a good way to assist first-time
buyers.
- Piggyback. This loan was developed to help borrowers with a small down
payment avoid private mortgage insurance (PMI). It’s actually two loans: a
first trust deed for 80 percent of the property value and a second trust deed
for about 10 to 15 percent of the property value. The borrower must have the
remaining 5 to 10 percent as a down payment. The interest rate on the second
loan has a higher interest rate, but it still ends up being cheaper than
paying for PMI. There are also tax advantages, because the payments on the
second loan are deductible and PMI is not.
- Lo-doc or no-doc loans. For those who can’t stand all the paperwork,
these loans require minimal documentation. But to qualify, you’ll need a hefty
down payment (often 25 percent or more) and be willing to pay higher fees or a
higher interest rate.
- Graduated payment. Designed for first-time buyers, these loans offer
smaller monthly payments in the first few years to help people get adjusted to
homeownership. After three to five years, the payments grow to their full
level. The bad news is that the shortfall each month gets added to the loan
balance. This is called negative amortization.
- Hybrid ARMs. These increasingly popular ARMs, also called a 3-1, 5-1, 7-1
or 10-1 loan, offer the best of both worlds: a lower interest rate (like ARMs)
and a relatively fixed payment.
