Understanding Different Types of Mortgages & Which One Is Best for You
Choosing the right mortgage is key to getting a better home loan interest rate and a lower monthly payment. Understanding different types of mortgages and which one is best for you can help you make the right decision.
Fixed-rate mortgages are the most popular type of mortgages because they provide predictability and stability to your payments. However, these loans can have some disadvantages as well.
Fixed Rate Mortgage
The most popular type of mortgage, a fixed rate mortgage offers borrowers a fixed interest rate for the life of the loan. These loans are known for their stability and predictability, making them ideal for homebuyers looking for a long-term commitment to their property.
However, a fixed-rate mortgage can also be expensive. As mortgage rates have been rising in recent years, many borrowers are paying higher-than-normal monthly payments. In order to reduce their overall debt, borrowers may opt for a refinance to get a better rate.
Some home buyers choose to use a fixed-rate mortgage for the first several years of their mortgage term, then switch to an adjustable-rate mortgage (ARM). ARMs usually have a low introductory rate that remains constant for 5, 7 or 10 years. The ARM can be an attractive option for homebuyers who plan to sell their homes in a few years or those whose credit scores have improved significantly over the past few years.
With a fixed-rate mortgage, your payment will remain the same throughout the life of the loan, even if your housing expenses go up. This is a significant benefit for homeowners who want to budget and save.
Another advantage of a fixed-rate mortgage is that you have a firm grasp on how much you need to save each month. You can easily see how much you have left over after your mortgage payment each month for the next 15 or 30 years, and you can plan your budget accordingly.
A fixed-rate mortgage may be more difficult to qualify for than an ARM, so its important to make sure your financial picture is solid before you apply. Youll also need to have a stable income and strong credit.
The most common type of fixed-rate mortgage is the 30-year conventional fixed-rate loan, although 15-year and 20-year options are available. These shorter terms allow you to pay off your mortgage faster and build equity faster, but the monthly payments may be higher than with a longer-term loan.
Whether youre looking to buy or refinance your home, well help you find the right mortgage for your specific needs. Talk to one of our licensed Loan Officers today to start the process!
Adjustable Rate Mortgage
An adjustable rate mortgage, or ARM, is a type of home loan that has an interest rate that fluctuates with the market. This is often a good option for first-time homebuyers because it typically has lower initial interest rates than fixed-rate loans. However, borrowers should understand that an ARM can end up costing them more in the long run because they may not be able to afford their monthly payments if the interest rate goes up.
ARMs generally have an initial fixed rate period that ranges from 5 to 10 years. The loans interest rate can then change at specific intervals based on the market, such as once a year or every six months. The term length is also important because it can make a big difference in your monthly payment.
For example, a 5/1 ARM has a five-year fixed rate period and then the interest rate will adjust every year. Another common ARM is a 7/6 ARM, which has an interest rate that adjusts every six months.
Most ARMs come with caps, which limit how much the interest rate can change and your monthly payments can increase. These caps protect you from getting into trouble with an ARM, and they can help you build your credit score by making timely payments on time.
In addition, a low introductory interest rate can help you save money during your initial period. But an ARM can be risky if you plan to stay in your home for a long time. Changing interest rates can be a major factor in your monthly payment and your credit score, so make sure you do the math before you commit to an ARM.
Moreover, a fixed-rate mortgage is a good option for borrowers who want to build their credit score by paying on time and are planning to stay in the home for a long period of time. Its an especially good choice for those who are refinancing because it will help them pay off their old loans with one at a lower rate.
Adjustable-rate mortgages are typically offered by the same lenders that offer fixed-rate mortgages, including banks and credit unions. Theyre also available through government-backed mortgage programs like FHA and VA.
Interest Only Mortgage
An interest-only mortgage is a home loan that doesnt require you to pay any principal during its first few years. However, your payments will increase after that period ends if you continue to have the mortgage. In some cases, your monthly payment can be higher than it would be on a 30-year, fixed-rate or adjustable rate mortgage (ARM).
You Should Only Consider An Interest Only Mortgage If Your Financial Situation Is Perfect
An interest only mortgage is a good option for people who want to keep their housing costs low and have enough cash on hand to cover their payments. This type of mortgage is also popular among borrowers who are buying homes as investment properties or expect to come into more money before the interest-only phase ends.
The primary benefit of an interest-only mortgage is that you can take advantage of the initial tax benefits of the mortgage while paying only on the interest. In addition, if you make extra payments on the loan during the interest-only phase, you can lower your monthly payment and possibly even build equity in the home.
Unlike conventional mortgages, which combine the principal and interest in your monthly mortgage payments from Day One, an interest-only mortgage is a nonqualified mortgage, meaning that Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase most mortgages to help credit flow to homebuyers, dont buy or back these types of loans.
These loans are typically more difficult to find and can be challenging to qualify for. The key is finding the right mortgage lender that understands your specific needs and can provide you with sound advice.
You Should Only Consider An Interest Only Loan If Your Financial Situation Is Perfect
The main disadvantage of an interest-only mortgage is that your monthly payments will be much higher later on. You can build equity during the interest-only period, but it will take longer to do so than if you used a conventional mortgage. Its also more expensive if you dont sell or refinance in the future. This may be an especially big concern if you arent sure whether housing prices in your area will drop significantly in the future, as this could put you underwater on your mortgage.
There are several different types of mortgages available, and it can be difficult to choose the right one. Especially when youre in the market for a large or expensive home. Understanding how they work and which is best for your financial situation can help you make the right decision.
Jumbo loans, also known as non-conforming mortgages, are a popular option for people looking to finance the purchase of a high-priced home. These mortgages arent backed by Fannie Mae or Freddie Mac, so they can be much higher in price than a conventional loan.
They can be a great way to finance a dream home in your favorite community, but you should only use them when the property is truly beyond your price range. Youll need a high credit score, plenty of cash for a down payment and other costs, and enough income to cover your monthly payments.
Youll want to speak with a lender who has experience in jumbo mortgages to find out what you can expect. Theyll be able to tell you if its the right choice for you and what type of interest rate you can expect.
A jumbo loan is generally more difficult to qualify for than a conforming mortgage. Thats because lenders set stricter requirements because these loans carry more risk.
To ensure that a borrower has the ability to pay back a large mortgage, many lenders ask for credit scores and debt-to-income ratios (DTI) that are higher than those required for conforming loans. In addition, they may request that a borrower has cash reserves to cover up to one year of loan payments and origination fees.
Its also common for jumbo lenders to require larger down payments than those offered on conforming loans. This can add up quickly, especially when considering all of the closing costs and appraisals that a jumbo mortgage requires.
You can avoid a jumbo loan by making a bigger down payment on the home youre purchasing. You can also consider a hybrid mortgage that allows you to make a smaller down payment and pay off your mortgage in a shorter amount of time.