Today's homebuyer has more financing options than have ever been available
before. From traditional mortgages to adjustable-rate and hybrid loans, there are
financing packages designed to meet the needs of virtually anyone.
General Loan Categories: Fixed-rate, adjustable-rate, and hybrid loans
Fixed-rate mortgages
A fixed-rate mortgage carries the same interest rate for the life of the loan.
Traditionally, fixed-rate mortgages have been the most popular choice among homeowners,
because the fixed monthly payment is easy to plan and budget for, and can help protect
against inflation. Fixed-rate mortgages are most common in 30-year and 15-year terms, but
recently more lenders have begun offering 20-year and 40-year loans.
Adjustable-rate mortgages (ARM)
Adjustable-rate mortgages differ from fixed-rate mortgages in that the interest rate and
monthly payment can change over the life of the loan. This is because the interest rate
for an ARM is tied to an index (such as Treasury Securities) that may rise or fall over
time. In order to protect against dramatic increases in the rate, ARM loans usually have
caps that limit the rate from rising above a certain amount between adjustments (i.e. no
more than 2 percent a year), as well as a ceiling on how much the rate can go up during
the life of the loan (i.e. no more than 6 percent). With these protections and low
introductory rates, ARM loans have become the most widely accepted alternative to
fixed-rate mortgages.
Hybrid loans
Hybrid loans combine features of both fixed-rate and adjustable-rate mortgages. Typically,
a hybrid loan may start with a fixed-rate for a certain length of time, and then later
convert to an adjustable-rate mortgage. However, be sure to check with your lender and
find out how much the rate may increase after the conversion, as some hybrid loans do not
have interest rate caps for the first adjustment period. Other hybrid loans may start with
a fixed interest rate for several years, and then later change to another (usually higher)
fixed interest rate for the remainder of the loan term. Lenders frequently charge a lower
introductory interest rate for hybrid loans vs. a traditional fixed-rate mortgage, which
makes hybrid loans attractive to homeowners who desire the stability of a fixed-rate, but
only plan to stay in their properties for a short time.
Balloon payments
A balloon payment refers to a loan that has a large, final payment due at the end of the
loan. For example, there are currently fixed-rate loans which allow homeowners to make
payments based on a 30-year loan, even thought the entire balance of the loan may be due
(the balloon payment) after 7 years. As with some hybrid loans, balloon loans may be
attractive to homeowners who do not plan to stay in their house more than a short period
of time.
The length of time you plan to own your property should have a direct influence on the
type of loan you choose. If you plan to stay in a home for 10 years or longer, a
traditional fixed-rate mortgage may be your best choice. If you plan on owning your home
for a short period (5 years or less), then the low introductory rate of an adjustable-rate
mortgage may make the most financial sense. In general, ARMs have the lowest introductory
interest rates, followed by hybrid loans, and then traditional fixed-rate mortgages.
FHA and VA loans
U.S. government loan programs such as those of the Federal Housing Authority (FHA) and
Department of Veterans Affairs (VA) are designed to promote home ownership for people who
might not otherwise be able to qualify for a conventional loan. Both FHA and VA loans have
lower qualifying ratios than conventional loans, and often require smaller or no down
payments.
FHA and VA loans are not issued by the government. The loans are made by private lenders
but insured by the U.S. government in case the borrower defaults. While any U.S. citizen
may apply for a FHA loan, VA loans are only available to veterans or their spouses and
certain government employees.
Conventional loans
A conventional loan is simply a loan offered by a traditional private lender. They may be
fixed-rate, adjustable, hybrid or other types. While conventional loans may be harder to
qualify for than government-backed loans, they often require less paperwork and typically
do not have a maximum allowable amount
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