If you’re in the market for a house, it’s important to understand what your mortgage options are. We previously wrote about a few types of loans, but we want to add a few more to the mix.
A mortgage can loosely be defined as a loan secured by physical property, which would be your house for this example. All mortgages are the same in this respect, but they differ greatly in how much interest you’ll pay on it and for how long you’ll have to pay it. Some mortgages will offer an interest rate that will never change over time; others might have an interest rate that can increase or decrease, to a certain limit. Interest rates for every type of mortgage will be affected by how much of a down payment you put on your home.
Here are three basic types of mortgages to select from when purchasing or refinancing your home:
Fixed Rate Mortgage: A fixed rate mortgage carries an interest rate that will stay the same forever, no matter how long the length of the mortgage. This means your rate will never go up. However, lenders usually require a higher interest rate from the start to accommodate for this. A fixed rate mortgage might be recommendable for those who are in very good place financially and have a solid credit score.
Adjustable Rate Mortgage: An Adjustable Rate Mortgage or ARM provides a fixed interest rate initially, but can change over time based current market rates. The rate will only change during a certain period of time every several years, referred to as the adjustment period. The initial fixed interest period can be shorter than a year and is usually less than five years. When considering an ARM, also take into account that a cap, a limit to how high the interest rate can increase, can be negotiated with most lenders.
Balloon Mortgages: A balloon mortgage is similar to an ARM in that it has a fixed interest rate for a period of time, the difference being that the entire balance is due at the end of the mortgage. These mortgages usually only last for about seven years and are sometimes seen as a short-term fix for people that cannot get approved for a fixed rate or adjustable rate mortgage. Generally, you wouldn’t apply for a balloon mortgage unless you knew you could pay off the balance. If you cannot pay the entire balance at the end of mortgage, you will be forced to get a new mortgage or face foreclosure on your home.
Choosing the correct mortgage for your needs is nearly as important as paying it off—in fact, they’re often intertwined. However, there are several types of mortgages, and the terminology can feel overwhelming when you’re just beginning this process. So, to help you out, we have defined a few of the most common types of home mortgages out there. Once you understand your options, choosing a course of action will be significantly easier.
Fixed-rate—This type of mortgage has the same interest rate for the entire repayment term. Therefore, the size of your monthly payment will stay the same. This is one of the most stable mortgage loan options available, but the interest charges are often high.
Adjustable-rate—An adjustable-rate mortgage has a changing interest rate. Though they often begin with a fixed rate for several years, the ARM will change every year following this period. These often start off with a lower rate than a fixed-rate mortgage but rise over time.
Conventional loan—This type of loan is not insured or guaranteed by the federal government in any way.
Government-insured loan—There are three types of government-insured loans: FHA, VA, and USDA/RHS.
- FHA is a mortgage insurance program managed by the Department of Housing and Urban Development. These are available to all types of borrowers, and the program allows borrowers to make very low down payments. However, monthly payments will be high because of mortgage insurance.
- VA is offered by the U.S. Department of Veterans Affairs. It is a loan program for military service members and their families. The loans are guaranteed and insured by the federal government. Borrowers can receive up to 100% financing for the purchase of a home, meaning no down payment whatsoever.
- USDA/RHS loans are provided by the United States Department of Agriculture and are managed by the Rural Housing Service. This type of mortgage loan is offered to rural residents with a stead, low-to-modest income.
Purchasing a home is increasingly seen as a cultural indicator of success and adulthood. Owning a home is a dream for Americans nation-wide, but that goal can only be achieved with the right players, the appropriate resources, and salient, informative advice. Most often, individuals and couples need to borrow money in order to purchase their homes; mortgages, then, make up much of the United States economy. However, there are hundreds of different types of mortgages—how do you know which is best for you and your financial needs?
A mortgage is a very long commitment—the length will vary by lender and type, but most standard, fixed-rate loans have a 30-year payment period. As a result, choosing a mortgage is a very important decision; getting the wrong option can be devastating, and you could suffer potential consequences for years to come. Starting the borrowing practice with the right set of tools is necessary to both pay your mortgage at a fair rate and avoid potential foreclosure. That’s where we come in.
The Internet is a great resource for finding the perfect mortgage fit. However, blogs and informative sites can only go so far; even with all the information, you will still want the satisfaction of having a professional’s approval. That’s exactly what we do. We specialize in helping you avoid typical mortgage pitfalls by pairing you with a perfect loan. We take into account fees, interest rates, and loan conditions when matching you with a lender and loan type. With us, you are guaranteed to find the best mortgage for you, your financial status, and your future home.