Years you plan to stay in the home

Recommended program

1-3 years

3/1 ARM, 1 year ARM or 6 month ARM

3-5 years

5/1 ARM

5-7 years

7/1 ARM

7-10 years

10/1 ARM, 30 year fixed or 15 year fixed

10+ years

30 year fixed or 15 year fixed

Advantages

Disadvantages

Monthly payments are fixed over the life of the loan

Higher interest rate

Interest rate does not change

Higher mortgage payments

Protected if rates go up

Rate does not drop if interest rates improve

Can refinance if rates go down

Advantages

Disadvantages

Lower initial monthly payment

More risk

Rates and payments may go down if rates improve

Payments may change over time

May qualify for higher loan amounts

Potential for higher payments if rates increase

30 year term, no balloon payment

Advantages

Disadvantages

Lower initial monthly payment

Risk of rates being higher at the end of the initial fixed period

Lower payment for a predetermined period of time

Risk of foreclosure if you cannot make balloon payment, refinance, or exercise the conversion option

Many balloon mortgages offer the option to convert to a new loan after the initial term

Balloon payment requires you to sell or refinance after the term, as opposed to a 7/1 or 5/1 program with a 30 year term

Advantages

Disadvantages

Lower down payment

May be subject to income and property value limitations

Easier to qualify

Some government subsidized programs may generate a recapture tax if you sell the house too soon

Lower rates may be available

Education courses may be required to qualify for these loans

Advantages

Disadvantages

You have several payment options

Higher rates

Lower monthly payments

Principal loan balance will not decrease during the interest only payment period

Qualify for a higher loan amount

Payment will be higher for the remaining term

Qualify at the interest only payment

Option to pay the full normal payment

Interest only payments for up to ten years

Advantages

Disadvantages

No out-of-pocket loan costs at closing

Higher rates

Closing costs are paid from the lender rebate

Higher payments

Less money required to close

Some lenders may have a short payoff penalty which is usually charged to the loan broker, but may be passed on to you

Refinance without increasing your loan amount

Some require a prepayment penalty for the first one to five years

Advantages

Disadvantages

Potential for reestablishing credit if you pay your mortgage on time

Higher rates

When used for debt consolidation, you may be able to reduce your monthly debt payment

Terms may not be as favorable

Harder to get long-term fixed loans

Loans may have prepayment penalties

Advantages

Disadvantages

You only borrow what you need

Rates can change. The maximum interest rate can be relatively high

Pay interest only on what you borrow

Payments can change

Flexible access to funds

Harder to refinance your first mortgage

Interest may be tax deductible

May be free of closing costs

A good source for an emergency fund, if set up in advance

Can be used for debt consolidation and lower payments

Rates are usually lower than consumer loan or credit card rates

Advantages

Disadvantages

Fixed Loan Fixed payments

Higher interest rates compared to first mortgage

Interest may be tax deductible

Harder to refinance your first mortgage

Get cash out for any purpose

Interest is paid on the entire loan amount, compared to an equity line of credit