Trendy loans not a good fit for everyone
By SUE MCALLISTER
If mortgages can be fashionable, then interest-only and zero-down loans are the trendy way to borrow right now. But beware. These loans are not right for everyone. Here's a quick look at interest-only and zero-down loans and their advantages and disadvantages.
Typically an interest-only loan is an adjustable-rate mortgage with a 30-year term, but with an introductory period — five or seven years, for example — during which borrowers are required to pay only the interest that the principal is accruing. Not all interest-only loans have a fixed rate during the interest-only payment period.
At the end of the interest-only period, payments will rise, as the principal is amortized over the remaining term of the loan (25 years, for example). On most loans, the interest rate adjusts annually.
For a $500,000 loan at 5.25 percent during a seven-year interest-only period, the monthly payment is $2,188.
For a $500,000 fixed-rate loan at 5.25 percent interest in which the borrower pays both principal and interest, the monthly payment for the full term of the loan is $2,761.
Lenders will also require that you have at least a few months worth of reserves that would allow you to pay your mortgage if you lose your job, said Scott Larson of Chase Manhattan Mortgage in Campbell, Calif.
That's what Mathew and Megan Haugen of Half Moon Bay, Calif., did when they bought their townhome in December for $480,000 with a zero-down loan.
"In the past five months we've seen a 10 percent increase in the value of our home," said Mathew Haugen, 30, a salesman with an Internet ad firm. The couple hopes to live in the home a few years, then borrow against their equity to buy a larger house and keep the townhome as a rental.
"The zero-down just allowed us to start the process much quicker," he said.
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