Understanding Your Mortgage Options

 

   

  
  

To help you understand the basics of the most common loan types, we've provided you with an overview below. To learn more about specific loan products.

 

Fixed Rate Mortgage

 

Features:
  • The interest rate on a fixed rate mortgage remains the same over the term of the loan.
  • Your monthly principal and interest payment will never change throughout the life of the loan.
Benefits:
  • Fixed rate mortgages are especially suited for those who expect to remain in their homes for a number of years.
  • Low or no down payment programs are available.
Advantages:
  • Your mortgage payment is not affected if interest rates go up in the general market.
  • Your monthly payments remain constant, so you can easily budget your finances.
Disadvantages:
  • Interest rate may be higher on a Fixed Rate Mortgage than an Adjustable Rate Mortgage.
  • Your mortgage payment is not affected if interest rates decrease.

 

Adjustable Rate Mortgage (ARM)

 

Features:
  • The interest rate on an Adjustable Rate Mortgage (ARM) fluctuates over the term of the loan.
  • The interest rate can change yearly, bi-yearly, or monthly depending on the type of ARM mortgage you have.
    • ARM – A traditional ARM adjusts for the same periods for the life of the loan. For example, a 6 Month ARM is fixed for the first six months and adjusts every six months afterwards. A traditional ARM usually offers a lower interest rate than a hybrid ARM but it adjusts more quickly.
    • Hybrid ARM – A Hybrid ARM has an initial “fixed” period of 3, 5, 7 or even 10 years, during which time the interest rate does not change, regardless of what the underlying index may do. After the initial fixed period is over, the interest will adjusted periodically to follow the market. The adjustment period is usually 6 months or 1 year. For example, a 5/1 hybrid ARM functions as a fixed-rate mortgage for 5 years and after that the rate adjusts every year.
Benefits:
  • Generally, the initial interest rate is lower than that of a fixed rate mortgage. The lender bases its interest rate and payment calculations on the index and margin of the mortgage. The index is a base rate that the lender then adds the margin at each adjustment period to determine a new interest rate. Be sure to check the type of index your mortgage lender is using, because some fluctuate more than others.
  • If you know you'll be in your home for less than the term of the mortgage, this may be a product you should consider.
Advantages:
  • Generally the initial interest rate is lower than a fixed rate mortgage and therefore the monthly payment will be lower.
  • Because the interest rate and payment amount are lower, it may be easier to qualify for an ARM than a fixed rate.
  • The interest rate you pay will generally drop if prevailing interest rates go down.
Disadvantages:
  • If interest rates increase then your payment will also increase.
  • Large interest rate increases could make your house unaffordable.

 

Conventional Mortgage

 

Conventional mortgages are mortgages that are not obtained under a government insured or guaranteed program such as the Federal Housing Authority (FHA) or Veterans Administration (VA).

 

FHA Mortgage

 

A Federal Housing Authority (FHA) insured loan allows you to buy a home with a down payment as low as 3% of the purchase price. This may provide you with more buying power.

 

VA Mortgage

 

If you are currently in the United States military, or if you have ever served in U.S. armed forces, you may be eligible to get a loan guaranteed by the Veterans Administration (VA). If you qualify, this special government benefit to veterans might be a good option for you as it allows you to purchase a home with little or no down payment.

 

Balloon Mortgage

 

Features:
  • Principal and interest payments remain constant for the term of a balloon mortgage, which is usually five to seven years, although principal and interest are amortized over 30 years.
Benefits:
  • Generally, the initial interest rate is lower than that of a fixed rate mortgage.
  • If you know you'll be in your home for less than the term of the mortgage, this may be a product you should consider.
Advantages:
  • Balloon mortgages are typically offered at lower interest rates than other fixed products, making them more affordable.
  • It may be easier to qualify for a balloon mortgage than a traditional 30 year fixed mortgage because of the lower interest rate.
Disadvantages:
  • At the end of the five to seven years, you must pay off the mortgage. This usually means you must refinance or sell your home.
  • If you have to refinance in order to pay off your mortgage, your interest rate and your payment could be higher depending on current market rates.

 

Bridge Loan

 

A form of second loan that is collateralized by the borrower’s present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold.