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Homing in on the right mortgage

The Baltimore Sun

I have received much e-mail lately from buyers who are worried about not being able to find a good mortgage lender.

They had a bad experience with their former lender or they're nervous because of all they've been reading about big banks writing down their bad mortgage loans.

Choosing the right lender takes time, effort, lots of phone calls and maybe even a few hours on the Internet.

This week and next, we'll explore how to figure out which mortgage type is right for you and then how to find a good mortgage lender.

The first step is to know what you want. There are a handful of basic mortgage programs from which to choose. At its most basic, there are fixed-rate mortgages and adjustable-rate mortgages.

Fixed-rate means the interest rate of the loan is fixed throughout the loan term. The only change will be if your property taxes or insurance payments go up or down and the lender requires you to pay more or less into your tax escrow account. (You generally can count on the payments going up, by the way.) ARMs are loans that can have fixed rates for six months to 10 years. After that initial period, they adjust based on a financial index to which they're pegged.

Typically, ARMs cannot go up more than 1 or 2 percentage points a year, and there is a lifetime cap on how high the payment can rise, typically 5 or 6 percentage points over the life of the loan. But some ARMs don't have that kind of limit on the first year that the ARM adjusts, so the increase can be as high as 5 or 6 points for that year.

Most other loan programs are variations on these two loan types.

Negative amortization loans, also known as option ARMs, are ARMs that start out at a super-low "teaser" interest rate that is typically several percentage points below the lowest market rate.

But you're not getting the deal of a lifetime. What's happening is that the interest you should be paying (but you're not, because you've got a teaser rate) is added to the balance of your loan.

That's right, the total amount of the loan you owe to the bank will go up as long as you have a teaser rate in place. So your monthly payments are low, but your total balance could rise from $100,000 to $105,000 over the course of the first year.

Interest-only loans allow you to pay only the interest owed on the loan. The loan can be made as a fixed-rate mortgage or an ARM. But because most of what you pay in the first 10 years is interest, this won't save you much. Also, because you're not paying down any principal, your balance remains the same.

The other major type of mortgage is the balloon loan, which was popular in the 1940s and 1950s. You pay monthly on the loan. At the end of the loan term (typically three, five, seven or 10 years), the entire remaining balance must be paid off in full. If you're going to stay in your home for seven to 10 years or more, I'd suggest a fixed-rate mortgage. If you're going to sell sooner or refinance your mortgage, then think about an ARM or hybrid ARM of some sort.

Recently, however, as some real estate markets have softened, homeowners have found out the hard way that it isn't easy to sell your home when you want to and for the price you'd like.

So give yourself enough cushion when selecting your next loan. If you think you will live in a home for only three years, you might want to choose a five-year ARM just in case.

Next week: How to find the right mortgage lender for you.

Contact Ilyce Glink at, or by mail at Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or by calling her radio show at 800-972-8255 from 11 a.m. to noon Sundays.

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