Today's
home buyer has more financing options than have ever
been available before. From traditional mortgages
to adjustable-rate and hybrid loans, there are financing
packages designed to meet the needs of virtually anyone.
While
the different choices may seem overwhelming at first,
the overall goal is really quite simple: you want
to find a loan that fits both your current financial
situation and your future plans. Though this article
discusses some of the more common loan types, you
should spend time talking with different lenders before
deciding on the right loan for your situation.
General
categories of loans
Most loans fall into three major categories: fixed-rate,
adjustable-rate, and hybrid loans that combine features
of both.
- Fixed-rate
mortgages
As the name implies, a fixed-rate mortgage carries
the same interest rate for the life of the loan.
Traditionally, fixed-rate mortgages have been the
most popular choice among homeowners, because the
fixed monthly payment is easy to plan and budget
for, and can help protect against inflation. Fixed-rate
mortgages are most common in 30-year and 15-year
terms, but recently more lenders have begun offering
20-year and 40-year loans.
- Adjustable-rate
mortgages (ARM)
Adjustable-rate mortgages differ from fixed-rate
mortgages in that the interest rate and monthly
payment can change over the life of the loan. This
is because the interest rate for an ARM is tied
to an index (such as Treasury Securities) that may
rise or fall over time. In order to protect against
dramatic increases in the rate, ARM loans usually
have caps that limit the rate from rising above
a certain amount between adjustments (i.e. no more
than 2 percent a year), as well as a ceiling on
how much the rate can go up during the life of the
loan (i.e. no more than 6 percent). With these protections
and low introductory rates, ARM loans have become
the most widely accepted alternative to fixed-rate
mortgages.
- Hybrid
loans
Hybrid loans combine features of both fixed-rate
and adjustable-rate mortgages. Typically, a hybrid
loan may start with a fixed-rate for a certain length
of time, and then later convert to an adjustable-rate
mortgage. However, be sure to check with your lender
and find out how much the rate may increase after
the conversion, as some hybrid loans do not have
interest rate caps for the first adjustment period.
Other
hybrid loans may start with a fixed interest rate
for several years, and then later change to another
(usually higher) fixed interest rate for the remainder
of the loan term. Lenders frequently charge a lower
introductory interest rate for hybrid loans vs.
a traditional fixed-rate mortgage, which makes hybrid
loans attractive to homeowners who desire the stability
of a fixed-rate, but only plan to stay in their
properties for a short time.
Balloon
payments
A balloon payment refers to a loan that has a large,
final payment due at the end of the loan. For example,
there are currently fixed-rate loans which allow homeowners
to make payments based on a 30-year loan, even thought
the entire balance of the loan may be due (the balloon
payment) after 7 years. As with some hybrid loans,
balloon loans may be attractive to homeowners who
do not plan to stay in their house more than a short
period of time.
Time
as a factor in your loan choice
As has been discussed, the length of time you plan
to own a property may have a strong influence on the
type of loan you choose. For example, if you plan
to stay in a home for 10 years or longer, a traditional
fixed-rate mortgage may be your best bet. But if you
plan on owning a home for a very short period (5 years
or less), then the low introductory rate of an adjustable-rate
mortgage may make the most financial sense. In general,
ARMs have the lowest introductory interest rates,
followed by hybrid loans, and then traditional fixed-rate
mortgages.
FHA
and VA loans
U.S. government loan programs such as those of the
Federal Housing Authority (FHA) and Department of
Veterans Affairs (VA) are designed to promote home
ownership for people who might not otherwise be able
to qualify for a conventional loan. Both FHA and VA
loans have lower qualifying ratios than conventional
loans, and often require smaller or no down payments.
Bear
in mind, however, that FHA and VA loans are not issued
by the government; rather, the loans are made by private
lenders but insured by the U.S. government in case
the borrower defaults. Remember too, that while any
U.S. citizen may apply for a FHA loan, VA loans are
only available to veterans or their spouses and certain
government employees.
Conventional
loans
A conventional loan is simply a loan offered by a
traditional private lender. They may be fixed-rate,
adjustable, hybrid or other types. While conventional
loans may be harder to qualify for than government-backed
loans, they often require less paperwork and typically
do not have a maximum allowable amount.
back
to Loan Articles
