When contemplating making a real estate purchase, financing options are the first consideration for most people. There are several different types of mortgages available to buy a home. Knowing the basic information about each type will help buyers make an informed decision about which types of mortgage loan is right for their particular situation. There are two categories that most mortgage loan types fall under; conventional mortgage loans and government mortgage loans.
Fixed-rate
A fixed-rate mortgage loan is a loan that keeps the same mortgage rate for the entire life of the loan. With this loan, the borrower does not have to worry about the uncertainty of the real estate market, and the chance that the interest rate might increase. For buyers who plan on staying in their home long term, this is a good option if they are worried about long-term security in finance rates. Loan terms for fixed-rate mortgages are available from ten to forty years. During the early years of the loan, most of the payments go toward paying the interest charged on the loan. Fixed-rate loans have historically been the most common type of mortgage loan issued. While a longer-term loan will provide lower monthly payments, a shorter-term loan will charge less in interest. However, if home buyers take out a longer-term loan, they still have the option of paying down the mortgage by paying more than their monthly mortgage note.
Adjustable-rate
With an adjustable-rate mortgage loan, the interest rate and monthly mortgage payment may vary over the life of the loan. The interest rates and payment may be low for the first several years of the loan. However, when market interest rates go up, the interest charged and monthly payments can increase drastically. Most adjustable-rate mortgages have a cap on the interest rates giving home buyers some protection from escalating interest rates and fluctuations in the housing market. For home buyers who are planning to move soon or those planning to refinance, this may be a good option to take advantage of the initially lower interest rates offered.
Hybrid ARM
These types of loans are a combination of the fixed-rate and adjustable-rate mortgage loans. They offer a fixed interest rate for the first few years, usually offered in one-year, three-year, or seven-year options. After this period of fixed rate interest, the rate starts to adjust. There is no guarantee of what the interest rate will be after the initial fixed-rate term has expired. Buyers should be prepared for the possibility of higher interest rates after the original fixed-rate term ends and make sure they are prepared to make these higher mortgage payments.
Interest-only
An interest-only loan allows home owners to make payments toward the interest only for the first few years of the loan term, normally five years. A disadvantage is that it will be difficult to pay down the loan quickly, since no payments are going toward the principal. A benefit is that it allows home buyers with limited incomes to make initially low monthly mortgage payments. The longer the home owners pay the interest-only payments, the higher the remaining payments will become over the life of the loan.
Balloon
A balloon mortgage loan is a short-term loan available for five, seven, or ten years. The interest rates are low until near the end of the loan term, when a large remaining payment or “balloon” payment becomes due. The buyer has the option to refinance at the end of the loan. This type of mortgage loan may be ideal for those wishing the refinance their home in the next five to ten years.
FHA
A FHA mortgage loan is one that is insured through the Federal Housing Administration. These are fixed-rate mortgages designed to help first-time and low-income families afford to buy a home. The loans can be used for single or multiple-family homes, providing the buyer intends to live on premises. Advantages of FHA mortgage loans are that they are usually easier to qualify for and require a lower down payment than traditional mortgages. Some FHA loans can be secured for as little as a three percent down payment.
USDA
The USDA Rural Development Guaranteed Housing Loan program is facilitated by the United States Department of Agriculture. These loans are offered to loan income families who live in small towns or other rural areas. The loans offer low interest rates and do not require a down payment. There are geographic and income restrictions with USDA mortgage loans. Another benefit with the USDA mortgage loan is that borrowers are not required to buy mortgage insurance.
VA
The VA home mortgage loan is only for members of the armed forces or their family members. They are administered by the Department of Veterans Affairs. Veterans or current armed services members can finance 100 percent of their home purchase, eliminating the need for a down payment. The home buyer must be able to demonstrate the ability to make the monthly payments in order to qualify for a VA loan.
What type of mortgage loan a home buyer secures should be based on several different considerations, including how much money is available for a down payment, the buyer’s credit score, and how long the home buyer plans to live in the home. After deciding which type of mortgage loan is right for a home purchase, the next logical step is to be pre-approved, which will simplify the home-buying process further.
