If you've been following the mortgage news lately, you might get the impression that it's all but impossible to get anything but a standard fixed-rate mortgage these days. But while it's true that many of the so-called "exotic" mortgages that were popular a few years ago have pretty much disappeared, consumers still have other options besides a "plain vanilla" type mortgage, including ARMs (adjustable rate mortgages) and interest-only loans, to name a couple.

If you've been following the mortgage news lately, you might get the impression that it's all but impossible to get anything but a standard fixed-rate mortgage these days. But while it's true that many of the so-called "exotic" mortgages that were popular a few years ago have pretty much disappeared, consumers still have other options besides a "plain vanilla" type mortgage, including ARMs (adjustable rate mortgages) and interest-only loans, to name a couple.

In fact, there's still a considerable amount of activity in ARMs in particular, which currently make up about 10-15 percent of the current mortgage market, according to Bob Walters, chief economist for Quicken Loans. He said it's a shame that ARMs sometimes get lumped in with some of the more exotic loans that have recently acquired bad reputation.

"Adjustable rate mortgages have been around forever and some people find them a great way to do a home loan," Walters said, adding that some ARMs are "as standard and conservative as the day is long."

ARM rates "fantastically low"

ARM interest rates are "fantastically low" right now, Walters said, enabling borrowers to lock in a 3, 5 or 7-year ARM at a rate around 3.75 percent. For a person who doesn't expect to be in the house a long time, Walters said an ARM can be a great option.

"If you know your employer is going to move you in 3-5 years, it might make a lot more sense to take an (ARM) interest rate that's a point lower," he said.

"Five-year ARMs are extremely attractive for the right borrower - one who doesn't need the security of a 30-year loan," said Dan Green, a loan officer with Waterstone Mortgage in Cincinnati and author of The Mortgage Reports blog.

Green noted that earlier this year, lending on ARMs pretty much dried up because interest rates were nearly the same as those on fixed-rate mortgages, eliminating the usual incentive for getting an ARM. Now that ARMs are back to about a percentage point lower, borrowers are regaining interest once again.

He said that while ARMs can lower the monthly house payment, consumers shouldn't use it to buy a more expensive home than they could with a standard loan.

"An ARM shouldn't be a budgeting tool - it shouldn't be a way to afford a home," he said. "You use it as a financial strategy rather than a financial means."

Qualification based on standard mortgage

Walters expressed a similar view, noting that his company now qualifies ARM borrowers based on the maximum target rate the loan might reset to, rather than the current low rate. He said they follow a similar policy on interest-only loans, qualifying the borrower on the basis of a fully amortizing loan and not what their expenses would be under the interest -only option.

He said an interest-only loan can be an attractive option for a financially savvy borrower who wants to direct part of his or her income into other channels instead of a mortgage payment, such as paying down other debt, investing or saving.

Closing costs and credit, income and down payment requirements are currently about the same for ARMs and interest only loans, although the latter does feature a slightly higher interest rate, about an eighth or quarter percent higher, according to the two men.

Other mortgage options still there, but hard to get

Some of the other mortgage products that were popular a few years ago are only available to those with very good credit or at a high cost in terms or interest and fees.

"For the most part, all of the (mortgage) products that were there a few years ago are still there, they're just harder to qualify for," said Green. He said lenders are imposing higher hurdles in terms of credit score, down payments and debt-to-income ratios.

"You don't see many second mortgages anymore," said Walters, referring to "piggyback" loans commonly used to eliminate the need for coming up with a down payment. "They're not completely gone, but you don't see them as much as they used to be."

Other unconventional loan types, like Alt-A and 100 percent cash-out mortgages, have pretty much disappeared, Walters said. The former required no proof of income; in the latter, the mortgage not only covered the full price of the home, but also loaned additional cash to the borrower at closing that was secured by the home loan.

    Published on September 17, 2008