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More Than Just the Fixed and Adjustable Rate

Most homeowners are faced with the traditional fixed rate loan or an adjustable rate mortgage. But there are other options available.

Sure the fixed rate loan works great if you are getting a mortgage when rates are low and you plan on staying in the home long term. And adjustable rate loans are a good option is you plan on moving soon. But you don't have to stop there. Here are some other options to keep in mind. They may suit your situation better than either of the traditional mortgages.

COFI Anyone?

This is another type of adjustable. It is based on the cost of funds index. It adjusts monthly instead of annually. This means your mortgage payment could change each payment. There are no caps.

This is the ultimate in adjustable rates. So why would you want to consider this? Because the COFI is 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. for checking accounts, savings accounts, CDs, etc.). It is a slow-moving index.

The other benefit is that COFI loans allow you to pay as much as you want off each month. Of course, if you are interested in this type of loan, you will have to ask. It is not typically brought up by a lender.

No Doc

Some homeowners just don't have the right profile for the typical loan. Maybe you are self-employed and will have a hard time showing your true income. Perhaps your credit is less than stellar. There is another option for you: the no doc loan.

These loans normally only ask for verification of 1) employment, 2) credit or 3) assets. The paperwork is minimal at best. But they do require a hefty down payment.

In return for a quick loan with few papers to be signed, you will have to fork over at least 20 - 25% of the loan value as your down payment. The good news is that not only will it eliminate the need for paperwork, but will also eliminate the need for private mortgage insurance.

Hybrid Loan

Can't make up your mind? Want part of one deal and part of another? You can have it. This is a mix and match system. You can create a loan custom-designed for you. These are called hybrid loans.

In most cases, the loans are fixed for a set number of years (1, 3, 5, 7) and then converts to an adjustable rate. This is a good choice if you are planning on moving within the fixed rate portion of the loan and you get a good rate. The also work well if you plan on getting a raise within those first years and will be able to easily handle an adjustable rate.

Some hybrid loans work in a two-step fashion where the loan is fixed for 5 or 7 years then adjusts once to another fixed rate for the remaining 25 or 23 years. This is called a two-step loan.

Balloon Loan

Balloon loans are short-term loans. Your payments are amortized the same way a 30-year loan would be, but only for the first 3 or 7 years. At the end of the initial period, you are expected to pay the rest of the loan amount in a lump sum. Normally this means getting another mortgage once the balloon mortgage becomes due.

These type of loans typically have a lower interest rate than fixed rate loans. They are a great option if you plan on selling before the lump sum is due. If not, you will be subject to getting another loan and taking your chances with the interest rates.

Based on information from The Motley Fool and AHA

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