Q: I’m looking for a way to minimize my payments on my mortgage. Our property has escalated in value about 50 percent within 12 months. We may move out in the next year, or we may stay 15 years.

I’ve noticed that several mortgage lenders advertise “smart” loans, or loans that seem to give you the option of deciding how you’re going to pay, what interest rate you’re going to be paying, or even whether you’ll make a payment that month as well.

I figure if my required payment goes down, then I can add more in principal. One loan I looked at reamortizes in a year, so if I contribute extra to the principal, the payment would go down. And, there are some months where I’d rather pay just the interest on my mortgage because my wife is a teacher and doesn’t get paid in the summer.

What do you think about these loans?

A: Glad you asked.

There are all sorts of interesting and creating financing techniques that lenders are coming up with to cater to the booming real estate market. Mortgage companies are waking up to the fact that people have incomes that vary, and managing cash flow can be a very effective tool when it comes to a payment as big as a mortgage (which is typically the single largest item in a monthly budget).

Before you sign on the dotted line, I’d take a look at some of the other products out there. Many lenders offer “option” mortgages, which allow you to even skip a payment or two a year.

Interest-only loans might be an interesting choice. While you’d have to make your monthly interest payments each month, the payment would be a lot lower, allowing you to tack on extra for the principal as your cash flow increases. This would also be a good choice if you wind up staying only another year.

If the loan is an adjustable rate mortgage, be sure you understand what index the loan is tied to and how the interest rate is calculated. You don’t want any surprises after closing.

I took a look at the loan you mentioned in your email (I eliminated the name of the lender for the purposes of this column) and I wonder if you noticed the disclosures in the fine print.

The company offers either a loan at 3.5 percent for 1 year, or a 3-year ARM at 4.75. If you choose the first loan, your APR is 6.24 percent, and the lender will charge you 2.375 percent in points due at closing. That’s pretty steep, I think, considering the typical lender earns just 1 percent at closing.

If you choose the second loan, the 3-year ARM at 4.75 percent, your APR is 5.931 percent, with 2 points due at closing.

With either of these loans, the interest rate is going to zoom up after the initial fixed period of the loan is over.

These loans seem rather risky to me. One thing to keep in mind with super-low “teaser” rates is that the interest rate is going to go up. The question you should be asking is, “How much?”

The way some of these creative loans work, if your payment isn’t enough to cover the interest owed on the loan, the difference between what you paid and what you owed might get tacked onto the back end of the loan, a tricky feat known as “negative amortization.”

In short, if your loan has negative amortization, you could wind up paying interest on your missed interest payments.

Once you’ve fully investigated all of your options, then you’ll know if this particular loan is right for you.

Published: Jul 8, 2005