To help you better understand your home loan options, we’ve prepared helpful information on the most common loan types
There are many home loan products on the market today. To help you make an informed decision on your loan options, we have prepared information below on the most common loan types available. If you would like additional home loan information, or if there is a loan type that is not listed that you would like to know more about, please don’t hesitate to contact us.
With a fixed-rate mortgage, your interest rate stays the same, or “fixed”, throughout the term of the loan. Therefore, your mortgage payment stays predictably the same, making it easier to plan your spending each month. However, you typically pay a higher interest rate to make up for the lost income that could be gained from a rate increase and a higher interest rate lowers the total amount you can borrow. And though you’re protected from rising interest rates, you’re also stuck with a certain rate even if the going rates fall.
The most common fixed-rate mortgages are 15-year and 30-year, which refer to the time you have to pay off the loans. The interest rate on a 15-year mortgage is usually lower than a 30-year mortgage, meaning you’ll pay less over the life of the loan. But your monthly payments will be higher since you have half the time to pay off the mortgage.
Adjustable-Rate Mortgages (ARM)
Adjustable-rate mortgages are also called ARMs or adjustables. These mortgages typically start off with a lower “teaser” interest rate that stays fixed for a specified time, and then “adjusts” periodically depending on changes in the market interest rate. The risk to you is that the interest rate-tied to a money market index such as the one-year U.S. Treasury bill or certificates of deposit-will fluctuate (“up” as well as “down”), and so will your payment.
A good reason for considering an ARM is if you don’t plan to stay in your home for very long; another is if you’re sure your income will increase enough to cover the maximum payment possible. And, of course, if interest rates go down, so will your payments. With these loans, the lender is taking less risk since they get to charge you more interest when the rates go up. As a result, you can typically borrow a larger amount, making it possible to buy a home you wouldn’t otherwise be able to afford.
An example of an ARM is the 10/1 ARM. This loan has a fixed interest rate (and monthly payment) for the first 10 years, with an annual (that’s what the “1” in “10/1” refers to) adjustment to the interest rate for the next 20 years of a 30-year loan. The lower the first number, (for example 7/1 ARM, 3/1 ARM or even 6-month ARM), the lower your initial interest rate. How often rates are adjusted is established at the time you apply for your loan.
Balloon loans have a lower interest rate than a fixed-rate mortgage. The interest rate stays stable for a specified time-such as 5, 7 or 10 years. But when that time is up, you still have to pay off the entire balance of the loan. Borrowers consider balloon loans when they don’t qualify for a traditional mortgage, or during periods of high interest rates. The idea is to refinance when the loan balance is due.
VA, FHA and FMHA Mortgages
If you have less than 20% of the purchase price to apply to a down payment, you can ask your lender about loans guaranteed by the government organizations below. These mortgages offer competitive interest rates, with little to no money down, such as:
- VA (Veteran’s Administration Mortgage): Qualifying veterans can get VA loans with no money down.
- FHA (Federal Housing Administration Mortgage): Designed for people with modest income, these mortgages usually require a down payment of around 3% to 5% of the purchase price and offer competitive interest rates.
- FMHA (Farmers Home Administration Mortgage): These no-money-down loans are for individuals with limited income who prefer to live in rural communities. These loans are often significantly below the current market interest rates.
If you would like additional home loan information, or if there is a loan type that is not listed that you would like to know more about, please don’t hesitate to contact us.