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Home > Consumer Focus Archive > Choosing Home Mortgage Products
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Consumer Focus: Choosing Home Mortgage Products
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Choosing Home Mortgage Products
 Although the 30-year fixed rate mortgage is still the most popular, today’s buyers increasingly turn to more non-traditional financing options to make the dream of home ownership a reality. Reviewing the options can be a daunting and confusing task at best. And, even though it may be tempting to decide quickly, consumers must consider all aspects of these loans very carefully.
Posted: June 1, 2005
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 Newly-popular mortgage products explained
40-year mortgage
A 40-year mortgage is a conventional mortgage, but instead of repaying the principal over the standard 15, 20 or 30 years you pay it off over 40 years. In many cases, the lender simply extends the life of its 30-year fixed-rate mortgage to 40 years. Some lenders also offer a 40-year version of their adjustable-rate mortgage (ARM).
- The benefits of this loan are two-fold:
- Lower monthly payments than a traditional mortgage over the life of the loan, and
- Additional purchasing power for buyers who are close to being able to afford the home they desire.
- The major drawbacks include:
- Paying more interest over the life of the loan, and
- Taking longer to build equity since a smaller percent of the monthly payment goes to reducing principal on the loan.
- This type of financing is most suited for you if:
- You are a young first time home buyer and anticipate many earning years, or
- You want to increase purchasing power and buy more house by stretching payments over a longer period of time, or
- You have a small down payment, or
- You live in a high-cost area.
- When choosing this type of loan, carefully consider whether a slightly lower monthly payment is worth paying 10 additional years of interest on the loan. Depending on the amount of the loan, additional interest can add up to thousands more.
Interest-only mortgage
An interest-only mortgage allows you to pay only interest for a fixed period of time -- usually the first 5 to 10 years of the loan, thus resulting in a lower monthly payment. After the interest-only period has expired, you have the remainder of the term to repay all of the principal, plus interest. Remember that you can still put money toward the principal during the interest-only period, but make sure interest is recalculated on the new balance.
- The benefits of this loan:
- Lower monthly payments than a traditional mortgage for the first few years, and
- Additional purchasing power, and
- Since mortgage interest payments are generally tax deductible, you may be able to deduct 100% of your monthly payment at tax time (consult your tax advisor to see if you are eligible).
- The major drawbacks of this loan:
- At the end of the interest-only period the payments will be much higher than if you had initially taken out a traditional mortgage, and
- During the interest-only period, you will build equity only if the value of the home increases, and
- If your home or the housing market you're in loses value, you could end up owing more than the house is worth.
- This type of financing is most suited for you if:
- You expect to earn a lot more money in a few years, or
- You expect to receive a large amount of money at some time in the future that could be used to reduce the principal on your mortgage, or
- You invest the money you would have paid as equity and your investment returns exceed the rate of home appreciation.
Reverse mortgage
Until recently, you could get cash from your home by selling and moving out or by borrowing against your home’s equity and then paying the loan back monthly. Now, reverse mortgages provide you with a third way of getting money from your home and you won’t have to leave your home or make regular loan repayments. A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. This type of loan allows you to convert built-up home equity into a tax-free income stream while still living in your home. It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you die, or sell or permanently move out of your home.
- The benefits of this loan:
- Add a tax free supplement to your retirement income, and
- The funds from the loan can generally be used for any purpose, and
- No re-payment is due as long as you live in the home.
- The major drawback of this loan:
- You must be at least 62 or older to qualify for this type of loan, and
- Can be expensive to borrowers who use them for only a short time since they include the same type of financing fees as traditional mortgages, and
- Proprietary reverse mortgages are almost always the most expensive type of reverse mortgage but if you live in a higher-valued home, you might be able to get more cash from this type of loan than from a federally insured Home Equity Conversion Mortgage (HECM).
- This type of financing is most suited for you if:
- You are 62 years of older and own your home, and
- You want to continue living in your home and do not want to relocate, and
- You need a supplement to your retirement income, and
- You have already determined eligibility for any public benefits you may qualify for.
- When choosing this type of loan consider:
FINAL NOTE: The primary source of information about 40-year and interest only mortgage products is usually the financial institution that is selling you the loan. Keep this in mind as you shop and be sure to compare the rates, fees, conditions, etc. from at least 3 institutions before making your choice. Use this handy Mortgage Shopping Worksheet to help you compare features of each loan.
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 Apply online for mortgage financing
Online financial service providers have increased in number and popularity over the past few years. Many now offer complex lines of credit and mortgage products. These providers provide convenience and flexibility demanded by many consumers. Follow the tips below to find out whether this type of financing is for you.
- Pros
- Online mortgage providers are a convenient way to do business with a financial institution 24 hours a day, 7 days a week.
- Even if you prefer to use a traditional “brick and mortar” lender to finance a home purchase, online lenders can assist you with your shopping process. Some provide you with offers from 3 to 4 different lenders so you can pick the best offer. You can also compare these online offers to offers from “brick and mortar” lenders.
- If you are interested in comparing rates in your area, a web site such as bankrate.com gives you access to this information without collecting your personal data.
- Cons
- Read the privacy policy carefully for any company that requests sensitive personal information, such as social security numbers and birth dates. Remember that companies that collect personal financial information are required by law to provide you with a privacy policy and an opportunity to opt-out of some information sharing.
- Be aware that a company's lengthy privacy policy privacy doesn't necessarily mean they are not sharing your personal information. Many of them openly state that they only share your information with “partners” or “affiliated lenders.” It is important for you to realize that these companies may have hundreds or even thousands of “partners” or “affiliated lenders.” This information sharing may result in a significant increase in solicitations through e-mail, postal mail, or telephone calls.
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 Mortgage Brokers
- A mortgage broker is a firm that originates and processes loans for a number of lenders. In 2003, about 65 percent of home loans were originated through brokers. The main difference between a mortgage broker and a mortgage banker is that the mortgage banker lends the bank's own money. The mortgage broker’s role is to introduce the borrower to a lender and to do much of the paperwork. The actual lender decides whether to underwrite the loan and at what rate and terms; the broker doesn't make those decisions.
- There are benefits to working with a broker vs. a banker. When choosing whether to use a broker, carefully evaluate the choice based on the rate offered and fair closing costs.
- The National Association of Mortgage Brokers is the trade association for mortgage brokers. Information on their web site will help you find a mortgage broker in your area, give you an overview of the Federal laws regulating the mortgage industry.
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 Your legal rights
The Real Estate Settlement Procedures Act (RESPA) is a law designed to protect consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships. You should be aware of certain rights
before you enter into any loan agreement including 40-year, interest only, and reverse mortgages and whether you get the loan online or from a traditional financial institution.
Protect yourself from loan fraud by taking a home ownership education course through a
HUD approved housing counseling agency.
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Other Resources
This is just a brief overview. For more information, check out these resources:
Read these publications online or order them from FCIC:
Websites*:
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mentioned, this does not mean or imply that it is unsatisfactory.
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