NEW YORK ( TheStreet) -- Everyone knows the exotic mortgage types -- or toxic ones, in many cases -- are a thing of the past, left to the dustbin of the pre-crisis days. Well, not exactly. Look hard enough and you'll see that not every borrower has to settle for a standard 15- or 30-year fixed-rate loan.
How about an interest-only ARM? Yes, they exist, and can be useful for borrowers who know what they are doing and can stomach some risk, or plan to pay the loan off in just a few years instead of keeping it for the full 30 years.
The worst offenders of the bad old days are indeed gone -- things such as negative-amortization loans where the debt grew over time instead of getting smaller. But there are plenty of adjustable-rate mortgages, where the interest rate resets every year after an initial period.
Typically, the starting ARM rate is lower than you'd get on a fixed-rate loan, where the rate will stay the same for the entire 15 or 30 years. But with a 30-year ARM, you face the risk of a higher rate after the initial period, typically one, three, five, seven or 10 years.(SCHW), the brokerage, that charges 3.5% for 60 months, then adjusts annually for the remainder of the 30 years. Though the interest rate can go up by as much as 5 percentage points after five years, principal payments do not begin for 10 years. interest-and-principal ARM , which would charge 3.375%. For a 30-year fixed-rate loan charging today's average around 4.5%, you'd pay $1,267. Remember, though, that if after five years you sold your old home and used the proceeds to pay off the ARM, you'd have to pay the full $250,000 debt. If you took the 30-year fixed loan described, you'd owe about $228,000 after five years, since every payment would have whittled at principal. This would offset much of the savings from the previous five years of low payments. So for the long-term borrower a standard fixed-rate mortgage is generally the best option today -- cheaper, most likely, than either type of ARM in the long run. But the IO ARM can make sense for someone who will pay the loan off in a few years and whose top priority is to shoulder the lowest monthly payment possible in the meantime.