Lenders now offer mortgages that are blends of
short-term ARMs and 30-year fixed-rate loans with a lower fixed-rate of interest
for a period of five, seven or ten years. Be sure that you understand what
happens at the end of the initial term before you sign on the dotted line for
such a loan.
Many of these loans revert to a 1-year adjustable
rate loan at the end of the initial term and can be adjusted once a year based
on an index tied to the cost of money. You should know how much over the index
your rate will be set and the limit or cap on how much your payments can
increase. A "balloon" note requires the entire balance to be paid to
the lender after the initial period of the loan ends. Most of these loans
require the lender to guarantee to refinance the note at that point if payments
have been timely. The lender should spell out how the re-finance rate will be
determined and what costs will be involved. These loans can help you buy a more
expensive house than you could afford with a 30-year fixed rate mortgage; just
be sure that you understand the terms so that you can assess the potential
risks.
