What Kind of Loan Should You Get?

Hungry for business now that the early '90s refinancing boom is history, lenders all over America are jumping through hoops to get your attention. They're slashing fees. They're eschewing down payments and lending more than 95% of a home's value. Some are even giving out prizes, like frequent flier miles or vacation getaways. At the same time, lenders are offering an unprecedented array of loan choices: short, long, fixed, any type of adjustable. The trouble is, all those options leave your mind swimming -- the last thing you want when picking a mortgage.

To help you discover which mortgage is right for you, we've created profiles of eight common mortgage shoppers, from someone who is temporarily cash-poor to someone in search of a "jumbo" mortgage of more than $240,000. Everybody's situation, of course, is different and yours might not be perfectly matched here. But this approach is a good way to learn about who uses the different types of loans out there and where the best place is to get them. But don't stop there. Use our rate database and our worksheets to compare fixed-rate and variable loans. Figure out whether you should take points up front or defer them. The key to getting the right mortgage is knowing exactly what you want. These sections will help you get there.

The Homesteader
You've just found a home in a nice neighborhood and you plan to stay there until your kids are through high school. Or maybe you're 65 and are buying your retirement home. In either case, you know you're not moving for at least a decade.

What you want: No doubt about it. In the current environment, you want a fixed rate mortgage. Rates on a 30-year fixed-rate loan are low, and though a fixed rate still costs more than an adjustable-rate mortgage, the difference between the two is not that great. The price of stability, in other words, is relatively affordable. If your monthly cash flow permits it, you might consider a 15-year loan. The monthly payment is higher, but you pay less interest over the life of the loan. You might pay even less for a more exotic loan -- one that stays fixed for seven years, for instance, and then adjusts. But the difference in cost is so minimal it's hardly worth it.

As rates ease up, so will the gap between the price of a fixed rate and the price of an adjustable. To run some numbers on what the effect is on your monthly payment, check out our Fixed or Adjustable worksheet. Chances are, even if the price is up somewhat, the long amortization of a 30-year fixed will make the effect negligible.

The Relocator
You're never going to spend more than a few years in this house. Maybe your spouse has a thing about moving. Maybe you know you'll eventually need space to work from home. Maybe you're planning on high-tailing it to Montana in a few years. This isn't where you'll grow old.

What you want: You're a candidate for an adjustable mortgage or maybe a "delayed adjustable." Also known as 3-1s, 5-1s and 7-1s, these loans are fixed for their first three, five or seven years, then convert to a one-year adjustable. If you are going to spend less than three years, take a look at one-year adjustables.You'll lose the stability of a fixed-rate loan, but if you're only going to stick around for a few years, why not get all the savings you can? Another thing: You can buy a "conversion option." For about $250 and a slight premium on the rate, many lenders will allow you to convert your delayed adjustable to a fixed rate, as long as you do so before the loan starts adjusting. This is good protection in case you stay put longer than you anticipated.

Can't decide whether to gamble on an adjustable rate or take the safety of a fixed? Check out our Fixed or Adjustable worksheet.

The Trader-Upper
You need a mortgage of more than $252,700. You know you can qualify for the loan, and you've got a sizable down payment. Are you still going to pay a huge premium for your "jumbo" loan?

What you want: In the past, lenders didn't like jumbos because if one went bad, the effect was like losing five smaller mortgages. That's why rates were typically one half to a full percentage point higher. But now, because of rising home prices and fairly stable rates, the race to write jumbo loans has become the most competitive part of the market -- and lenders no longer get away with charging so much for larger loans.

The product menu for jumbos has also expanded dramatically -- largely in adjustables. Indeed, nearly 75% of jumbo buyers choose adjustable-rate loans versus 31% of buyers in the overall market. Why? Because with loans of this size, it's even more important to get the lowest monthly payment. Lenders are also getting more flexible. Just a few years ago, you could only dream of getting 90% financing on a jumbo -- 75% was tops. But today you can get 90% or 95%.

Where to shop: Large banks have traditionally been the leaders in jumbo loans, largely because they have much bigger loan portfolios. They are still good bets. Brokerage firms, eager to please their more moneyed clients, are a good bet, too. But the fact is, just about any lender wants to sell jumbos, whether it's adjustable, delayed adjustable or fixed. "It's a very price-sensitive customer segment and also a very service-sensitive customer," says Sylvia Reynolds, senior vice president at Bank of America. "You have to deliver a competitive rate and excellent service to get the business."

The Gamer
Cash-flow is your primary interest. You just want the smallest out-of-pocket payment every month. This may mean refinancing every year, but that's OK. To you it's part of the challenge.

What you want: When there wasn't much difference in cost between fixed-rate and one-year adjustables, the market for one-year adjustables all but dried up. But now that the spread has widened a bit, ARMs are back. If you want the lowest possible payments, you'll find lenders dangling "teaser" one-year adjustables in front of your eyes.

A teaser is just what it sounds like: An introductory rate that will almost certainly shoot up by the maximum amount -- usually 2% -- in its second year. But wait. If you're really set on the lowest possible rate, you can go lower still. The teaser rates on loans known as COFI adjustables -- they get their name because they're tied to the cost of funds index in the Federal Reserve's 11th District -- are even lower.

Where to shop: Again, your best sources for adjustables are likely to be midsize banks and thrifts. As for COFIs, most large banks carry them. Try Citibank and Bank of America, for example.

The Temporarily Cash-Poor
You've found a great house, but qualifying for a big enough loan is a problem -- for the time being. Maybe you're in your second year at the district attorney's office with a handful of offers to double your income in private practice. Maybe you're just about to finish paying your son's Harvard tuition. In either case, you know your disposable income is about to jump -- and substantially.

What you want: The answer to your problem could be to "buy down" your loan, or pay another point or two up front to earn a lower interest rate. Then you can qualify for a bigger loan.

Consider what's known as a 2-1 buydown. You reduce the first year's rate by two points and the second year's by one point. In year three, the loan becomes fixed, and it stays at that rate for the life of the loan. That can help you buy a lot more house.

Where to shop: Buydowns are most commonly found at mortgage bankers, because they're typically an attachment to fixed-rate products, the mortgage banker's specialty. But they're not limited to mortgage banks. Try also midsize banks and thrifts, which will allow you to open an interest-bearing savings account (funded either by you or a gift from a parent or other relative), out of which funds are automatically drawn to keep the borrower's out-of-pocket expense low for the first few years. Plus, if you've got a brokerage account, you might be surprised at what it can do for you. Several Wall Street firms, including Merrill Lynch, are writing a lot of mortgages these days -- and they tend to be fairly flexible.

The High Earner / Poor Saver
You've got a good job and you've found a house you love. But you have been buried under student loans -- or you've been traveling the globe without a care -- and haven't been able to save for a down payment.

What you want: Only a few years ago you had practically zero chance of getting 100% financing. Lenders were so nervous about it, the option wasn't even on the menu. But the refinancing boom of 1993 changed all that. Many potential refinancers had lost equity in their homes. When lenders realized that didn't automatically make these people bad credit risks, many started taking a chance on them -- and they're still doing it today.

Surprisingly, there are even rare cases of getting 100% financing without paying for expensive mortgage insurance. (Mortgage insurance covers the lender in case you decide, having put nothing down, to walk away from your loan. On a $100,000 loan, a policy will cost you about $52 a month.)

The money in 100% financing these days usually comes bundled as a so-called 80-20 loan, or "piggy-backed second." That is, there's a first mortgage for 80% of the total and a second mortgage for the remainder. The bad news is that both come at astronomical rates. If you have anything to put down -- even 3% -- you'll save yourself a bundle. That's because Fannie Mae has standardized the lending criteria for 97% financing and will now buy these loans, which means that practically every mortgage lender can offer them.

Where to shop: In situations that are, shall we say, "odd," you're often best off visiting a mortgage broker. These people act as agents, directing you to a lender and then collecting a fee or a percentage of your loan amount. The fee is the key: They don't get paid unless you get a loan. It's critical, though, to choose only a broker that comes highly recommended -- and the recommendation should come from a friend or colleague who has actually used the broker, not from your real estate broker or builder. Clients who use mortgage brokers complain, for example, that brokers say they're canvassing a dozen or more sources when they've really only checked with two or three. Other grievances: Brokers tend to throw business to the lenders who are their friends, and they can slow the mortgage process, making you wait for details about the terrific rate they've gotten you until it's too near closing to shop anywhere else.

The Credit Delinquent
You've got a couple of 30-day late payments on your Visa card, and once you forgot to pay the phone bill. Will you be able to get a loan? Are you supposed to pay for your mistakes forever?

What you want: Tampa mortgage broker Chris Munzo says he used to have just one lending source for poor credit risks. But now that the market is infinitely more competitive, "I have six or seven lenders aggressively soliciting my [poor] credit business," he says.

One reason: Lenders have finally figured out that most people with 20% to 30% equity in a home aren't going to walk away from it, even if their credit is bad. The other reason: Many lenders now have systems that help them figure out how much of a risk a person actually poses -- and so can price their loans accordingly. It's called credit scoring. At ContiMortgage, for instance, you're an A-minus if you had one late mortgage payment in the past 12 months and two late credit card payments, a B if you had three late mortgage payments in the past year and two late credit card or car loan payments, and a C if you had several late mortgage and credit card payments in the past year -- and a bankruptcy anywhere in your past.

Where to shop: All lenders are more willing to write loans for bad credit risks these days, but your best bet may be a mortgage broker. "They used to call it 'hard money,' and mortgage brokers are where you had to go to get it," says North Carolina broker Christopher Cruise. "Today, you're generally still best off going to mortgage brokers for B, C and D credit." If you want a fixed rate, be sure to try a mortgage banker such as Household Finance or Beneficial Mortgage. These days, they'll take just about anybody.

The Clock-Racer
You're sunk. The people selling your dream house have another offer on the table -- and it's all cash. To entice them into taking your slightly higher offer, you're going to have to close as fast as humanly possible.

What you want: You're not out of luck yet. In the past two years, the average time it takes to process a mortgage has dropped to 30 to 45 days, down from 45 to 60 days. Now applications can be typed directly into a loan officer's laptop then modemed to the loan processor. Credit reports can be pulled electronically. In some cases, an underwriter will reply with a preliminary OK within hours. The operative phrase, of course, is "in some cases." You'll know you're dealing with an automated lender the minute his fingers start flying over the keys to pull your application together.

Where to shop: Small, local banks can be a big help when the pressure is on, as Bruce Nohe found out. After committing to closing on a Ridgefield, Conn., house in 30 days, he spent two weeks with a mortgage broker who promised financing -- then failed to come through. Nohe, who works for Citibank, knew that even his employer wouldn't be able to come to his rescue. But his local bank, the Norwalk Savings Society, got him a commitment in five days. He closed a week later. "When you called this bank, if you didn't get through to the person you were phoning, you'd get another live person who would track them down. They'd get back to you within a half hour," says Nohe. "I couldn't get in touch with my mortgage broker the week I was supposed to close."

And now, small lenders' prices are newly competitive on fixed loans, arms, even hybrids. They're doing this by joining forces with cash-heavy firms such as GE Mortgage Capital, which need staff to originate loans for them.

Brokerage firms, too, are known for closing in a hurry -- and for being accommodating in other ways as well. Merrill Lynch's Mortgage 100 program will allow clients to use their portfolio as a down payment on their house, preventing them from having to liquidate and incurring capital-gains taxes.

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