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
different choices may seem overwhelming at first, the overall goal
is really quite simple: you want to find a loan that fits both
your current financial situation and your future plans. Though
this article discusses some of the more common loan types, you
should spend time talking with different lenders before deciding
on the right loan for your situation.
categories of loans
Most loans fall into three major categories: fixed-rate,
adjustable-rate, and hybrid loans that combine features of both.
As the name implies, 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 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 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.
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
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 though 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.
Time as a
factor in your loan choice
As has been discussed, the length of time you plan to own a
property may have a strong influence on the type of loan you
choose. For example, if you plan to stay in a home for 10 years or
longer, a traditional fixed-rate mortgage may be your best bet.
But if you plan on owning a home for a very 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.
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.
Bear in mind,
however, that FHA and VA loans are not issued by the government;
rather, the loans are made by private lenders. FHA loans are
insured to the actual lender and VA loans are guaranteed in case
the borrower defaults. Remember too, that 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.
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.