Guide to Loans

LOAN TYPES

* 30-year fixed
* 15-year fixed
* Buydowns
* Piggyback
* Lo-doc or no-doc loans
* Graduated payment
* Two-step or 7/23
* Hybrid ARMs
* No-Equity Loans

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 top