Types of Home Mortgages
Let’s face it — most home buyers come into the process knowing just the basics about mortgages. After all, home mortgages can be complex and challenging to understand. There are also a lot of options out there. But don’t get overwhelmed by the idea! When it comes to home mortgages, Paris Group Realty, LLC agents are:
- Deeply knowledgeable
- Prepared with simple explanations
- Ready to help you feel comfortable, confident, and empowered to make the right decision for your financial situation
Not all home loans are the same. In the event you qualify for more than one option, it’s a good idea to do your homework before signing on the dotted line.
Fixed-rate mortgages are the most common type of mortgage and the one that most of our clients select. It’s a great option if you plan on living in your new home for many years to come, or if you want a set payment that you can count on.
Fixed-rate mortgages generally come in three different term lengths: 15, 20, or 30 years.
Once your loan amount and interest rate are calculated and locked in, a fixed-rate mortgage will guarantee that you have the same payment over the life of the loan. Making extra payments to the principal amount will allow you to pay off the loan sooner.
Keep in mind: If interest rates are high when you initially take out your loan, you’ll be stuck with that high interest rate unless you refinance. On the other hand, if you take out a loan when interest rates are low, you’ll be protected no matter how high interest rates rise in the future.
- The most common choice, especially for first-time home buyers, as it’s the easiest of the fixed-rate loans in which to qualify.
- Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of padding between the amount you can afford to spend and the monthly payment for your desired property.
- More desirable if you plan on staying in the same home for years since equity builds more slowly than for shorter-term loans.
- For income tax purposes, this term provides the maximum interest deduction.
- Pay off the loan in half the time of a 30-year loan
- Equity builds up more quickly than in a 30-year loan
- Pay off the loan in 2/3 the time of a 30-year loan
- The overall interest paid is considerably less than for a 30-year loan
Generally lower interest rates
Lower overall cost
Typically higher interest rates
Higher total cost
If you are more comfortable with financial risk or if interest rates are high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you.
With an ARM, interest rates are variable and generally start below the market rate compared to a fixed-rate loan, then change over time.
An ARM rate rises and falls depending on the prevailing interest rate, so your mortgage payment will rise and fall accordingly. If your income is not sufficient to cover the highest possible payments, this option may not be for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate mortgage.
Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms [COFI], or London Interbank Offered Rate [LIBOR]). Your payment will be based on the index your lender uses, plus a margin of generally two to three points.
Before signing on the dotted line, make sure you understand your lender’s ARM formula and get it in writing.
GOOD TO KNOW
Adjustable-rate mortgages are especially great if you plan to only own your property for a short amount of time — they can be considerably less expensive than a fixed-rate loan over a three, five, or even seven-year term.
Fortunately, the amount an ARM can increase is limited. There are caps on how much your lender can increase your rate, both within a one-year period and over the life of the loan. Plan ahead and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are uncertain you’ll be able to pay that amount on a monthly basis, we recommend you reconsider this type of loan.
If neither the fixed-rate nor the adjustable-rate mortgage seems like the right option for you, a convertible ARM might be the answer you’re looking for.
This alternative combines the initial advantage of a lower interest rate ARM with the ability to convert the loan to a fixed rate for an additional fee after a set period.
Consider this: Convertible adjustable-rate mortgages have more advantages when the initial interest rate is low and the future rate is not guaranteed.
VA & FHA
Government loans are another option available to those who meet the specific qualifications.
If you are a Veteran, service member, reservist, National Guard member or qualifying surviving spouse, the Department of Veterans Affairs (VA) Home Loan program can help you secure a no-down payment mortgage without requiring a private loan.
Keep in mind: There is a limit on the amount you can borrow with a VA loan, so this option works best for those buying a lower-priced home.
The Federal Housing Association (FHA) guarantees loans for lower-income Americans with a down payment as low as 3.5% of the purchase price. Good to know: To find homes that qualify for FHA loans, look for the phrase “FHA approved” when looking at listings.
Getting The Best Rate
Naturally, you want to get the best deal for the least amount of money. This holds true for mortgage rates as well. A lower interest rate means a lower monthly mortgage payment, which can save you money in the long run. It’s also easier to qualify for a lower payment than a higher one.
You Have Two Routes To Finding The Best Rate
Hire A Mortgage Broker
If you don’t have the time or experience to “do it yourself,” look for a qualified mortgage broker that can assist in finding the right mortgage for you. Ask friends and associates who have refinanced or purchased recently if they have a broker they can recommend.
You’ll want to find a broker who is energetic, flexible, and knowledgeable about finance and loans, and someone who has your best interests in mind.
Not sure where to start? We’ll vet brokers for you and recommend ones we trust so you can interview them and make a confident decision.
Do It Yourself
The Internet makes a lot of mortgage information readily available online. Once you’ve educated yourself about real estate loans, it generally just takes some time and energy to sift through online resources to find the information you need. Keep these things in mind:
- For more information on interest rates, do your research! Talk to your local bank or credit union and study the wealth of information available online. Both Bank Rate Monitor and E-Loan are great sources of information.
- Rates change quickly. That great rate you find today might not be there tomorrow. Once you find the rate you are looking for, jump on it — submit a loan application, and lock in that rate.
- When comparing loans, make sure you’re comparing loans of the same type. For example, you find that “Loan A” for a 30-year loan has a much lower interest rate than “Loan B” (also for 30 years). Upon further inspection, you find that “Loan A” is technically an adjustable-rate mortgage. Its payment is based on a 30-year amortization but becomes due through either payment or refinancing at the end of five or seven years. These are frequently referred to as a 5-year or 7-year fixed-rate mortgage. While both say, “30-year”, they are not the same type of loan.
- Once you’ve settled on a lender, ask for a statement that details all of the fees associated with the loan. Factors such as “points” (loan fee), interest rate, and “garbage fees” (extra fees that some lenders charge) can vary greatly from one lender to another.