Types of Mortgages
Purchasing a home can be quite intimidating. Research the many options available to you for financing a home, then you will be able to decide what sort of monthly payments you can comfortably afford now and in the future.
- Fixed: Conventional fixed rate loans are one of the most commonly used home financing option. With any fixed rate loan, the interest rate is locked in at the start of the loan, and remains the same throughout the mortgage term, regardless of changes in the market rate. These loans are not guaranteed or insured by a government agency.
- ARMs: ARMs (Adjustable rate mortgages) have an interest rate that raises or lowers at certain intervals according to an index. An ARM’s initial interest rate is usually starts out lower than a fixed mortgage, and goes up a specific amount above an index at intervals of a specific number of years. For example a “3-1-1” adjustable will go up at the third, fourth and fifth anniversary of the closing. The borrower must pay any increases made to the interest rate during the term of the mortgage. The borrower’s payments will increase when the interest rate increases, or become more affordable as rates fall.
- FHA Loans: Federal Housing Administration, an arm of the Department of Housing and Urban Development, was established specifically to assist first time home buyers in home financing, especially those with a low to moderate income. FHA loans are available from most lenders and require only a 3 percent down payment. FHA will work with state and local housing programs that help with down payments and closing costs.
- VA Loans: Loans sponsored by the U.S. Department of Veteran Affairs, they guarantee loans for eligible veterans, active duty personnel and surviving spouses. They offer competitive rates, lower or no down payments and minimum income requirements.
Think about your financial ability now and in the foreseeable future before choosing your loan to finance your home. Be sure to get an estimate of the payment you will be responsible to pay throughout the life of the loan (including tax and insurance) so you fully understand the monthly commitment.
Other Loan Options to Consider for Financing a Home
- Balloon Mortgage: A balloon mortgage has a fixed interest rate and fixed monthly payments, however after a certain time period (about 5-7 years), the entire balance of the loan becomes immediately due and payable. This is not a comfortable option, since most people cannot pay the balloon amount; it is a choice of last resort. Borrowers only choose this when they do not qualify for a standard fixed rate or adjustable rate mortgage. Their hope would be to improve their credit rating enough to refinance to a conventional or ARM mortgage before the balloon payment becomes due. This type of loan is risky.
- 80/20 Mortgage: This type of financing is also known as a Piggyback mortgage or 100% financing. It is actually two (2) separate loans. This type of financing is used because the borrower does not have a 20% down payment. An 80/20 mortgage eliminates the paying of private mortgage insurance. These loans are harder to come by in the newly tightened-up loan environment for home financing.
- Interest-Only Mortgage: An interest only mortgage is just that, the borrower pays only the interest on the loan, in monthly payments for a fixed term (about 5-7 years). At the end of that term the buyer may refinance, pay the balance, or start paying off the principal, which means a huge increase in the monthly payment. Many home equity loans are structured this way, with the expectation that homeowners will have the ability to pay them off before the end of the fixed term.
- Negative Amortization Loans: With this type of loan, the monthly payments are less than the interest accruing on the principal amount of the loan. The unpaid interest is added to the principal, thereby creating a “negative amortization”. Get it? You owe more and more every month.