Q&A: What is the best home loan for a short term mortgage?

Posted on Aug 12, 2012 in FHA Information

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Question by Tom W: What is the best home loan for a short term mortgage?
It is for an investment property and I am only planning on holding on to it for 3-5 years. What is the best home loan available with the lowest payment without any differed intrest?

Best answer:

Answer by lil_butterfly_girlie
Types of Mortgages
How much house you can buy also depends on your mortgage’s term and interest rate. The term is the length of time (usually 15 or 30 years) over which payments will be paid. The rate can be fixed (meaning it doesn’t change over the loan’s term) or adjustable (it fluctuates with market conditions). Thirty-year fixed-rate mortgages remain the most popular. The longer term lowers the monthly payment, page while the fixed rate provides stability over the life of the loan. Given relatively low interest rates, approved these mortgages are attractive to buyers planning to stay at least six or seven years in their new home. The drawbacks are low principal payments in the early years, and the risk that market rates will decline over the term. However, if your credit history is sound and you have sufficient income, you can usually refinance your mortgage when rates decline.

A 15-year term lowers the interest rate, reduces total interest payments, and increases principal payments. But it also increases monthly payments. If you can’t afford the higher payments now, you might opt for a 30-year mortgage. If there are no prepayment penalties, you can make additional principal payments as your income increases. Making just one extra monthly payment a year will pay off a 30-year mortgage in less than 22 years and can save tens of thousands of dollars in interest costs. If you plan to stay in a home no more than three years, you might want an adjustable-rate mortgage (ARM). ARMs offer initial rates that are lower than fixed mortgages. At some point, usually after the first year, rates are tied to market conditions and are subject to potential rate increases. Most ARMs include a cap on rate increases in any given year, as well as over the life of the loan. Some ARMs offer initial rates at least 2% below fixed rates and limit increases to 1% annually and 5% to 6% over the life of the loan. Many home buyers are attracted by the affordability of an ARM during the initial period. However, you should be confident that your future income will be sufficient if both interest rates and your monthly payments increase.

Another popular mortgage involves a balloon payment. A balloon is a lump-sum payment that pays off the loan in full after a fixed period of time. Generally the rates on balloon mortgages are 1/4% to 3/4% less than on 30-year fixed mortgages, but during an initial period of between 3 and 15 years, payments are similar. After this period, the remaining outstanding principal balance is either due in full or subject to refinancing. This is a good option for home buyers who plan to sell before the final payment is due. But because property values fluctuate, you may not be able to sell when you want. You may also face higher payments if you are forced to refinance at a higher rate, and there is also a risk that you may not be in a position to refinance when the balloon becomes due.

Three Steps to Finding the Right Mortgage

Estimate how long you expect to live in the house. If the answer is less than three to five years, consider an Adjustable Rate Mortgage (ARM), which typically starts out with a lower rate. If you plan to live in your new home longer than five years, a fixed-rate mortgage offers protection against rising interest rates.
Shop around for mortgage rates. Banks, credit unions, and mortgage companies all offer mortgages. Compare at least six lenders in your area.
Add up all the costs for each lender. Include fees, points, closing costs, etc., to arrive at the total mortgage cost for each lender.

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2 Comments

  1. the very BEST loan is the one you can always afford…talk to your local banks and financial institurions.
    in todays market you want to stay away from ARMs (adjustable rate mortgages)…the monthly payments will start to climb and before you know it the monthly payment will be out of your reach and you will be in a foreclosure.
    this is what is happening all across america right now…forclosures are up up up due to ARMs.

    stick with your local financial inst. and
    30 yr fixed rate no prepay penalty (20% down)
    ….this should be good..if your credit is good enough you will get a low rate.

    good luck 🙂

  2. If you only plan to hold the property for 3-5 years, they do have ARM programs that last 5 years. Meaning you get a low introductory rate for 5 years, then the adjusts, generally based on LIBOR, every 6 months to one year, with a cap on how high it adjusts. It will never adjust during your initial ARM period, and if it looks like you’ve decided to hold on to the property, you can refinance into a fixed rate before the ARM rate expires.

    You’re the perfect example of when an ARM loan is a good choice–as opposed to the ARM loans given to subprime lenders that are defaulting.