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 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.
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