What About Short-Term Fixed, Amortized over 30 Years?

What About Short-Term Fixed, Amortized over 30 Years?

The whole point behind an ARM, from a lender’s perspective, is to give a loan that can respond to interest rate fluctuations. Another way of accomplishing this is to give a shorter-term fixed-rate mortgage.

Currently lenders are offering short-term fixed-rate mortgages in the following time lengths, all amortized over 30 years, 15 years, 10 years, 7 years, 5 years, or 3 years. The shorter the term, the better the interest rate is. What this means is that after the initial period, you have a “balloon,” a single large payment where the remaining balance is due.

For example, you can get an interest rate reduction if you agree to get a loan with a balloon in 15 years (see the following). You might get an even bigger reduction if you agree to a balloon in 10 years instead of 15. If you agree to a balloon in 3, you might get the interest rate reduced the most. (Note: The monthly payments can still be spread out—amortized—on the basis of 30 years. It’s just that you have a shorter due date, or balloon payment at the end.)

TRAP—BEWARE OF THE BIG BALLOON PAYMENT AT THE END

On short-term fixed-rate mortgages, if it turns out that you can’t sell or refinance as you planned at the end of the term, you could lose the property to foreclosure! You’re gambling a lower interest rate on future market and personal financial conditions. Therefore, make sure a shorter-term mortgage includes an automatic refinancing option at the end. Usually this is an ugly adjustable, but at least if worse comes to worst, you won’t be without a loan.

Hybrid mortgages are available from banks, savings institutions, and mortgage brokers—anywhere that you’d get any other type of mortgage. However, your best sources are the mortgage brokers, who deal with many lenders, and thus have a better sense of what’s out there.

Balloon or Amortize (Spread Out) Payments?

You should get a balloon mortgage:

■ If you plan on reselling or refinancing soon

■ If you need a lower interest rate

■ If you can lock in a “roll-over” loan to cover the balloon when it comes due

You should get a fully amortized (paid off) mortgage:

■ If you want equal payments to fully pay off the loan

■ If you plan on keeping the property a long time

■ If the risk of a big balloon payment (or having to take out a high-interest roll-over loan) bothers you

What About a Fully Amortized 15-Year Mortgage?

Some people simply want a shorter mortgage. As opposed to the hybrids just discussed, in a fully amortized shorter-term mortgage, the payments are higher so it can be fully paid off at the end of, say 15 years. (With a hybrid, you have lower payments, but a balloon at the end—here the mortgage is paid completely.)

The advantage here is much less interest over time. With a 30-year amortized mortgage the total interest is more than twice as much at the same interest rate than with a 15-year fully amortized mortgage! Of course, you may be saying to yourself that this is all well and good—yes, you save more than half the interest. But you probably more than double your payments.