When it comes to financing a home, buyers have plenty of choices. Having lots of options means that buyers can find a mortgage that suits their needs. However, these options can also make financing a home overwhelming. So, we are going to explain the four most popular types of home mortgages, tell about the benefits and disadvantages of each, and explain when it is a good idea to use each type.
Adjustable Rate Mortgages (ARMS) have been in the news for months. We have heard reports about how home owners bought these mortgages originally with low interest rates, but now the payments have skyrocketed due to the rise of interest rates. The unpredictable nature of ARMS makes them a high risk mortgage. The benefits are that interest rates can be relatively low compared to other mortgages (depending on the market), and that your payments will decrease if interest rates go down. But along the same lines, your payments can go up dramatically if interest rates go up. So, we rarely recommend this type of mortgage to our clients.
Fixed Rate Mortgages are possibly the most popular type. This type of mortgage is great for people who do not want to take risks and for people who plan to live in their home for a longer period of time (more than eight or so years). With fixed rate mortgages, you know exactly what interest rate, principal payment, and interest payment you will make every month throughout the life of the loan because this amount will not change. You “lock in” that initial interest rate when you get a fixed rate mortgage. You will make the same payment now that you will make in fifteen, twenty, or thirty years (whichever length of time you decide). The benefits of fixed rate mortgages include a stable monthly payment and protection from rising interest rates. However, know that you may have slightly higher interest rates than some of the other loans start out with. And, if interest rates fall you will continue to pay your original rate.
Balloon Mortgages are good for buyers who know they are going to live in the home for just a few years. Balloon mortgages act like a short-term fixed rate mortgage in the beginning, but they “balloon” after a designated period of time (usually you can choose anywhere from five to ten years). When the loan balloons, you either have to pay the leftover amount or refinance that amount to pay. The pros of this type of loan are that you know what monthly payments you will make and what lump amount will be left over that you need to pay. And, sometimes these interest rates and monthly payments are more affordable compared to regular fixed rate mortgages. The con is that you will probably have to refinance at the rates available in five to ten years, and rates are not very predictable. But, if you know that you will be moving in a few years, then you will be getting a new mortgage anyway before your balloon payment is expected.
There are two main branches of Government Loans – Federal Housing Administration (FHA) and Veterans Administration (VA). Even though these are government loans, you can get either kind from most lenders. If you are a veteran, then you may be able to get the VA Loan. If you are not a veteran, you can apply to get an FHA Loan. Both loans are insured by the government, and they often result in a smaller down payment compared to other loans. The disadvantages of government loans are that only certain lower-priced homes are approved for the loans and that you have to go through many extra steps to receive this loan.
If you have any questions about mortgages, or if you would like help finding mortgage lenders, please email us or give us a call. We would be happy to help!