Types of Mortgage Loans
Prospective home buyers need to make several important decisions when buying a home, including choosing the best mortgage. There are currently several mortgage types to choose from, and thus you should do thorough research before making your final decision.
Fixed Rate Mortgage
Fixed rate mortgage has a fixed interest rate that covers the whole payment term. This means that your monthly payment will remain the same every month, and it will not change at any time. You also get to choose how long the loan term will be ranging from 10 to 50 years. If you wish to keep your home or the current interest rate is low, then using the fixed rate loan is undoubtedly the best choice.
Adjustable Rate Mortgage
In contrast to the above-fixed rate loan, adjustable rate mortgage generally adjusts the interest rate with time. Generally, the ARM rate will change each year after the first year of remaining at a fixed point. It is also called a hybrid loan since it begins with an unchanging or fixed interest rate and then switches to a changeable rate. If you wish to sell your home after several years, the ARM mortgage is recommended.
The Federal Housing Administration loan is a government sponsored loan that insures lenders against any loses they may incur due to borrower default. The advantage of this particular loan is that it allows for very little down payment of up to 3.5% on your house. However, your monthly payment will be high since you require paying for mortgage insurance.
This is a special loan program offered to service members in the military and also their families. The loans are also guaranteed by the government, and the major advantage is that borrowers get 100% financing to purchase a home. This basically means you do not need to make any down payment, and thus you can move into your brand new home immediately.
This is just like a fixed mortgage loan since it also has a structured and fixed repayment schedule. However, a balloon mortgage uses a significantly short loan term, normally between 5 and 7 years. The moment this period ends, the borrower is left with a huge outstanding loan balance.
Interest only Mortgage
This form of mortgage allows borrowers to have more flexibility in their repayment plan. They just pay the interest for a certain time without having to include the principal of the loan. This means lower payments over a very short period. Nevertheless, after the interest only period ends, payments should increase very significantly since it now also includes the loan principal.