Consumers looking for a way to finance a home today are faced with a smorgasbord of choices.
The 30-year, fixed-rate loan still dominates the home-loan market. But it has been joined by more exotic fare such as 20- , 15- and 10-year loans, and a variety of adjustable-rate mortgages such as balloon loans, two-steps, buy-downs and others.
"There are 100 products on the market. Even the mortgage DTC companies' solicitors don't know all the products that are available," said Christopher Artur, vice president of Artur Realty Inc.
However, individual lenders usually only offer a dozen or fewer of the most popular loans. And most of the loans are designed to get buyers past the biggest hurdles to homeownership -- interest rates and closing costs.
Few first-time buyers -- a group that constitutes 45 percent of the current market -- have the 5 percent to 20 percent cash down payment required on 30-year, fixed-rate mortgages, making it "especially important that the borrower has as many options as possible," said Brett Warren, vice president of residential lending at Jefferson Bank.
But one size does not fit all when it comes to mortgages. A home loan should be tailored to fit the borrower's lifestyle and financial needs. Too often, aspiring homebuyers and people who refinance arrive at the loan office fixated on obtaining the lowest interest rate and the lowest monthly payment possible.
In today's marketplace, where interest rates differ only slightly from lender to lender, the borrower may pay less attention to rates and more to upfront charges such as points or loan origination fees, and to the types of loans a lender is interested in making.
According to Mr. Warren, the borrower's homework should start even before they seek a real estate agent. "People need to look at where their incomes and jobs are going to be down the road," he said.
Some key factors consumers should consider before selecting the type of financing are:
How long do you plan to stay in this home? Five years or less, 10 years or longer? Knowing this is crucial in deciding whether a fixed-rate or adjustable-rate mortgage is best for you.
Do you want to pay points up front, or do you prefer to pay them over the life of the loan? A point is prepaid interest assessed by the lender at settlement, with one point equal to 1 percent of the total loan amount.
Do you want to gamble that interest rates will stay low and get an adjustable-rate loan, or would you feel more comfortable paying a fixed amount each month?
If the buyer is going to be in the house only five years before moving, the borrower might want to choose an adjustable mortgage with a low start-up rate.
Alternatively, consumers settled in for the long term might look for a 30-year fixed loan to "lock in" today's rates for decades.