Palm State Mortgage can present you with many varieties of mortgages to consider. There are not quite as many flavors of mortgages as there are Baskin-Robbins flavors of ice cream. Like ice cream however, there is a popular choice:

Just as vanilla continues to be the most popular ice cream flavor, conventional mortgages, are the plain vanilla of the mortgage world. In fact, the broad majority of our clients ultimately choose this style of mortgage.

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In the past we have informed you about several types of mortgages. The type you choose is determined not only by your taste, but by your financial life.

According to AnnaMarie Introitus’ recent article in the Wall Street Journal, lenders have begun to advertise a variety of mortgage styles.

With the wider options available, lenders are easing off some of their harsh requirements in their alternatives to the conventional loan. During the housing bust, many of the variable payment loan options were the financial ruin of borrowers who took too high a risk.

Today, some of these same options might make it easier for a borrower to buy a home. With their attractive terms, they might also have the power to lower your monthly payments for a number of years.

Key to our blog this week is the central theme that if you are considering a variable rate loan, you must understand the risk. Let’s look at some basic definitions of the financial flavors we like to call the “Big Three.”

1. The Old Fashioned Vanilla: Cool and Mellow Fixed-Rate Mortgages

In this loan, the “interest rate remains the same for the life of the mortgage, which means the monthly principal and interest payments never change.” You will pay a premium price for the privilege of this stable, consistent billing.

2. The Flavor-Changer: Hot and Spicy ARMS Mortgages

Most adjustable-rate mortgages have a fixed interest rate for three to 10 years, then the interest rate is adjusted annually. “ARMs are considered riskier than fixed-rate loans because the interest-rate adjustments can push borrowers’ monthly payments up by hundreds of dollars or more, depending on the size of the loan and the change in the interest rate.”

Some people do not mind the risky quality behind this loan, and thrive on its spicy flavor.

Perhaps you are aware that you will be getting some stock dividends or big promotions within your company during the five years before your loan payments go up. Just the same, this loan is flavored with risk, so Palm State warns you to be sure it won’t turn bitter or sour to you.

3. The Flavor-Of-The Month: Sweet-and-Sour Interest Only Loans

This is a fascinating style of mortgage, and one we have not discussed previously. It will entice you with the idea that you will only pay on the interest for 5-10 years before you begin to pay down the principal.

Be aware that the interest can fluctuate with the caprices of the economy. This type of loan is usually only available on large purchases, for prosperous clients.

The interest-only feature can initially save a borrower on lower monthly payments. Why would anyone take this type of loan?

Here is an example: You take out a 30-year $800,000 mortgage. You get a 3.2% interest rate that is fixed for the first five years. Thus your payments on an interest only loan would be about $2,153 per month. A similar loan without the “interest only option” would cost you about $3,364 per month.

You can see how this could get you into financial trouble if you did not save money for the sixth year, or when interest climbs up in the 8th or 10th year.

Remember that in that crucial sixth year, payments on the principal kick in. Palm State has discovered that many clients who net large semi-annual or annual bonuses can handle this type of loan. Sadly, during the housing crisis, we saw that many people who could not really afford their expensive houses, lost them in that sixth year.

“Interest-only mortgages became popular before the housing bust because they allowed people to afford more expensive houses.” But many borrowers were unable to keep up with the loans once their monthly payments increased. Their “homes ended up in foreclosure.”

There are other types of loans, but for today, we wanted to share some of the details of these “big three” popular flavors.

Call, and make an appointment with Palm State Mortgage experts. We will help you choose the flavor of a mortgage that you will love today, and tomorrow.

As we said, chances are your needs can be satisfied with the lovely, pure vanilla flavor of the conventional loan. Like Baskin-Robbins ice cream, just because they invent an attractive flavor, that doesn’t mean you have to try it. Still, it’s fun to know what is on the menu!