More Mortgage Options Help Aspiring Home Owners

Even at a time of record low mortgage rates, home ownership remains out of reach for millions of Americans. But there may be solutions.

The cost of the average home in states across the country may seem overwhelming to many people, but new mortgage options — combined with record-low interest rates — are making it easier for many aspiring home owners to pursue their dream.

Meanwhile, with so many options, it can be hard to figure out which mortgage is right for you. First, you need to find out how much you can afford to spend. Then you have to educate yourself about all of the options that are currently available to you. Keep in mind, some of the new mortgage options come with more risk than traditional mortgage options.

Can I Really Afford that Home?

Mortgage rates are once again hovering at near record lows with the current 30-year fixed rate mortgage at 5.37 percent, according to the Mortgage Bankers Association.

At this time last year, the average rate for a 30-year-fixed mortgage was 5.61 percent, off from the lowest ever recorded rate of 5.26 in June.

Although low mortgage rates equate to lower mortgage payments, they can often lead to greater debt. In fact, according to the Federal Reserve, U.S. consumers had $6.8 trillion in mortgage debt, accounting for almost three-quarters of their total debt at the end of 2003-up 64 percent from five years ago.

Additionally, the Federal Reserve's financial obligations ratio, a measure of consumers' abilities to repay their debts based on their current income, is at the lowest level it has been for the last two years.

When it comes to mortgage delinquencies, borrowers with poor credit histories and those who take out loans which are riskier to lenders (referred to as subprime loans) are more likely to have their homes foreclosed than standard borrowers (prime loans).

In fact, during the fourth quarter of 2003, the percentage of prime loans in foreclosure was 0.55 percent compared to 5.63 percent on subprime loans. Keep with Tradition: A prospective buyer should assess the following when purchasing a home: How much home they can comfortably afford and how long they plan on living in the residence.

When it comes to getting a mortgage, the traditional loan options of a fixed-interest rate or an adjustable rate mortgage (ARM) offer consumers the best options with the least amount of risk.

A fixed rate means the interest rate on your loan remains consistent throughout the life of the loan, unless you refinance or secure another loan. Typically, a fixed rate mortgage has a life of 30 years, but you can also secure this type of loan for a shorter timeframe, such as 10 or 15 years.

With an ARM, the interest rate on your loan adjusts over time. ARMs generally have a fixed interest rate for a short period of time, such as one, three, five or seven years — generally, the shorter the period, the lower the interest rate.

After this period elapses, the rate adjusts either up or down annually depending on interest rates at that time. There are overarching limits as to how much the interest rate can adjust which provides some protection for the borrower.

Unconventional mortgage madness: Median home prices rose 7.5 percent last year, the biggest increase since 1980 according to the National Association of Realtors. The current home buying environment — low interest rates and high prices — has spurred a new era of creative and "extreme" mortgages.

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