Loan options have multiplied over the years

The number of residential loan options available today is "almost ridiculous," said Jeff Tisdale, a broker at Skye Mortgage in Bellevue.

When he started as a mortgage loan officer 19 years ago, fewer than 20 banks offered a couple of variations on the most popular kind of mortgage — the 30-year fixed-rate loan. Now, Tisdale estimated, a broker can go to more than 150 banks and look at about 25 financing programs.

One of the mortgage options is turning out to be a dud.

The 50-year mortgage, started in California as a way to get people into homes in expensive real-estate markets, seemed like a good plan for buyers because they could have lower monthly payments over the life of the loan — half a century.

"Banks don't want something on the books for 50 years," Tisdale said. "Few lenders even offer them, and they actually have a higher interest rate over the long term. The monthly savings is slight."

A few lenders offer them in Washington state, but Tisdale does not think the 50-year mortgage will take hold here. A borrower with such a mortgage builds equity in the home very slowly, and because the rates on the loans are adjustable, monthly payments are likely to rise.

Another unconventional mortgage, the 40-year fixed-rate loan, is becoming more common. But Tisdale said that when you do the math, a 30-year interest-only loan is often a better deal for someone than a 40-year loan. (The interest-only period ends after five years or so.)

With a loan amount of $250,000 for example, the payment on a 40-year mortgage with an interest rate of 6.5 percent would be $1,463 a month. The interest-only loan would cost $1,302 a month at the same rate.

After five years, the homeowner with the 40-year loan has paid off $7,736 in principal. The borrower with an interest-only loan hasn't made any principal payments in that five years but has saved $9,693.

Historically, interest-only mortgages have been for affluent homebuyers. Tisdale and other mortgage brokers are "putting more people into the interest-onlys" because borrowers want the biggest house they can afford with the lowest monthly payment.

An interest-only mortgage is just what the name indicates. For a set period of time, usually five years, the homebuyer pays the interest portion of the loan each month, with nothing going toward the actual loan balance. Ideally, a homebuyer invests the amount that would normally pay down the principal.

With an interest-only loan, the borrower gains equity in the home in the first five years only if the property value increases. But with a traditional fixed-rate loan, little of the monthly payment goes toward the principal in the early years of a mortgage anyway.

At the end of the interest-only portion, borrowers face larger monthly payments of principal and interest to pay off the remainder of the loan over the next 25 years. At that point, many homeowners refinance.

Who should consider an interest-only mortgage?

• A homebuyer who expects to earn a larger income in a few years.

• Someone who is confident they live in a neighborhood where home sale prices are significantly and consistently increasing.

• Someone who will diligently invest the savings between an interest-only mortgage and a traditional fixed-rate loan.