The Different Types of Mortgages - A Home Buyer's Guide
Fixed Rate Mortgage
A fixed-rate
mortgage offers an interest rate that will never change over the life of
the loan. The primary benefit is that if interest rates increase during the
term of your loan, your rates stay the same.
On the other hand, if interest
rates drop during the term of your loan, your rates still stay the same (unless
you refinance your home at the lower rate). This is the biggest difference
between this loan and variable / adjustable loans (see next item).
The length (or "term")
of a fixed-rate mortgage can be 15, 20 or 30 years. Each of these terms has its
pluses and minuses:
- 30-year
fixed rate - The 30-year term gives you maximum tax advantage by having
the greatest interest deduction. It's also worth noting that the 30-year
fixed-rate loan is often the easiest type of loan to qualify for.
- 20-year
fixed rate - If you shorten your mortgage, you usually get a lower
interest rate. The 20-year mortgage is not as common as the 30-year, so
you'll have to shop around to go this route.
- 15-year
fixed rate - Same benefits as the 20-year term (quicker payoff, lower
rates), but will increase the monthly amount you pay.
Adjustable Rate Mortgage
(ARM)
The adjustable
rate mortgage (or "ARM") offers a fixed initial interest rate
with a fixed initial monthly payment. "Initial" is the key word here,
because after some predetermined initial period, the loan is subject to changes
in market conditions.
The initial interest rate you pay
will probably be lower than a fixed-rate mortgage; but the uncertainty, of
course, comes after the initial period. This type of loan is usually a good
option for buyers who only plan to stay in a home for a short while.
In other words, if you turn around
and sell the house before the initial fixed-rate period expires, you'll benefit
from the lower rate and be out before the uncertainty sets in.
How often the interest rate
adjusts with an ARM depends on the terms of the loan. Take the 5/1 ARM as an
example. 5/1 means your interest rate would stay the same for the first five
years and then adjust each year starting at the sixth year. A 3/3 ARM would
offer an initial fixed rate for three years and would then adjust every three
years starting at the fourth year.
Balloon Loan
The balloon
loan is a short-term, fixed-rate loan that lets you make small payments for
an introductory period of time. After the introductory period - usually five,
seven or ten years - you must refinance or pay off the remaining balance with
one lump-sum ("balloon") payment.
Government Loans (FHA, VA,
RHS)
FHA Loan - A loan
insured by the Federal Housing Administration, open to all qualified home buyers.
There are limits to the size of FHA loans,
but they are usually enough to cover most moderately priced homes. FHA loans
also offer low down payments (usually 3-5 percent).
VA Loan - A
long-term, low or no-down-payment loan guaranteed by the Department of Veterans
Affairs. Because VA home
loans are insured by the VA, they have the added benefit of zero down
payment. This type of loan is only available to qualified military veterans who
have obtained a certificate of eligibility from the Department of Veterans
Affairs.
RHS Loan - The
Rural Housing Service (RHS) loan offers low interest rates with no down
payment. It is available to households with low to moderate income located in
rural areas or small towns. This is one of many low-income home
buying programs backed by the federal government.
Brandon Cornett is the publisher of Home Buying Institute, the web's largest library of home buying advice. Be sure to check out the author's home buying guide located at http://www.homebuyinginstitute.com/home-buying-guide.php