Today's
homebuyer 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
mb–¦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.
