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GUIDE
TO LOANS
The Orange County Register
LOAN TYPES
No-equity loans30-year fixed:
This is the traditional mortgage, with stable monthly payments that
never change. This is probably the best choice if you're planning
to stay put for seven years or longer. For shorter periods, adjustable-rate
loans are usually cheaper. Fixed loans may also be harder to qualify
for than adjustable-rate loans. back to top
15-year fixed:
All the advantages of the 30-year loan, plus a lower interest rate
and you'll own your home twice as fast. It can also be used as a
forced savings plan. But if the real estate market is undergoing
modest appreciation, your money could earn a better return elsewhere.
Also, the tax advantages of a 15-year are reduced. back
to top
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. back to top
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 10 percent-15 percent of the property value. The
borrower must have the remaining 5 percent-10 percent as a down
payment. The second loan has a higher interest rate, but it still
ends up being cheaper than paying PMI. There are also tax advantages,
since the payments on the second loan are deductible and PMI is
not. back to top
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. But for people who have difficulty
proving their income (such as seasonal workers or people paid on
commission) it may be the only way to get a loan. It's also good
for people in a hurry. back to top
Graduated payment:
Designed for first-time buyers, these loans offer smaller monthly
payments in the first few years. After three-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.
Real estate appreciation could help you maintain equity in this
type of loan, but a flat or falling market could leave you with
a mortgage greater than what the house is worth. back
to top
Two-step or 7/23:
Though technically an adjustable, the rate only changes once at
the end of seven years (some lenders offer a 5/25 that adjusts in
five years.) At the end of the first seven years, one of three things
must happen: the entire loan balance is due in a balloon payment,
the borrower refinances into a new loan, or the interest rate on
the existing loan resets, typically to an above-average fixed-rate.
The payment stability is attractive, but many borrowers got trapped
in two-steps when their home values fell in the 1990s. When it came
time to refinance, homeowners didn't have enough equity to get a
new loan, so they had to accept the higher interest rate. back
to top
Hybrid ARMs:
These increasingly popular ARMs -- also called 3/1, 5/1, 7/1 or
10/1 -- offer the best of both worlds. A lower interest rate (like
ARMs) and a relatively fixed payment. For example, a "5-1 loan"
has a fixed monthly payment for five years and then turns into a
traditional adjustable based on then-current rates. It's a good
choice for people that expect to move or refinance before the adjustment
occurs. back to top
No-equity loans:
Typically used to consolidate credit-card debt, these loans permit
people with good credit to borrow as much as 125 percent of their
home value. No-equity loans usually lower a borrower's overall monthly
debt payments, but the fees on no-equity loans are typically 10
percent of the loan amount, and the borrower risks losing his or
her home if financial problems continue. back to
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