Thinking of purchasing a home? Unless you’re one of the lucky few who can plunk down a briefcase full of cash, it’s time to educate yourself about the different loan options available.
Fixed Rate Term
This is the classic mortgage instrument. Most terms are 15, 20, or 30 years, with interest rates increasing slightly as the term increases. Rates are fixed, ensuring that your payment won’t fluctuate. (Escrowed insurance and taxes can affect your monthly payment).
Variable-Rate or Adjustable-Rate Mortgage (ARM)
With a variable rate mortgage, the interest rate fluctuates with the markets after a short term of fixed interest rates. If the market rates rises, the variable interest rate will also rise which will affect your monthly payment. If market rates decrease, so will your monthly payment.
Federal Housing Administration (FHA) Mortgage Loan
FHA loans help those who may not otherwise be accepted by a bank to make a down payment and enter into a mortgage agreement. FHA loans have certain requirements that must be met in order to be approved.
This is a special program for those who have served or are currently serving in the US Armed Forces. VA mortgage loans offer competitive rates and low down payments. This type of mortgage is also available to widowed spouses of service men and women.
A balloon mortgage allows the borrower to make small fixed rate payments. However, at the full term of the loan, the remaining balance is due. While these loans may be a good tool for some homeowners, it can result in a financial headache for others.
Interest-only mortgages are similar to the balloon mortgage, but the interest alone is paid for a set term. At the end of the term, the entire balance must be paid off in large installments or refinanced.
A reverse mortgage is a tool for seniors who have equity built into their homes, providing them with cash for the property. No payments are required as long as primary residency remains the same. At the time of death, the property is sold, the mortgage paid and any remaining proceeds are transferred to heirs.
While these descriptions are just a brief overview of different loan programs, it’s important to remember to speak with a loan officer to decide which of these is right for you.