Before you buy a home, it’s important to understand your mortgage options. That includes fixed-rate versus adjustable-rate loans, as well as other loan types.
Conforming mortgages are loans that meet guidelines set by government-sponsored entities like Fannie Mae and Freddie Mac. These loans typically have lower interest rates and fees than nonconforming mortgages.
Types of Mortgages
Whether you’re buying your first home or refinancing an existing loan, the type of mortgage you choose can make a big difference in how much money you’ll pay over the life of your loan. While the most common mortgage is a 30-year fixed-rate loan, there are many other options to choose from.
The main difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is that with a fixed-rate loan, the interest rate stays the same for the entire life of your loan. In contrast, with an ARM, your rate can change after an initial introductory period and then reset periodically throughout the life of the loan.
A fixed-rate mortgage can be the best option for borrowers who want long-term stability, a consistent monthly payment and predictability. These types of loans can help borrowers avoid unpredictable fluctuations in their payments, which can impact their budgeting.
While a fixed-rate mortgage is the most popular, it also comes with some disadvantages. These include a higher initial interest rate, increased monthly payments and more fees.
Fortunately, there are other mortgage options that can be more flexible and have less of a risk to your finances. These include adjustable-rate mortgages, or ARMs, which can offer lower initial rates and shorter terms than fixed-rate loans.
When you’re choosing a mortgage, your lender will ask a number of questions about your income and credit. These will then be used to recommend a type of mortgage that fits your situation and financial goals.
Adjustable-rate mortgages, or ARMs, can be a great choice for some buyers, especially if they are considering buying their first home. These loans typically come with lower initial rates than fixed-rate loans, which can help borrowers save a significant amount of money over the life of their loan.
But ARMs also have some drawbacks, including changing interest rates and the need to make large adjustments when the introductory rate is set to expire. The fluctuating rates can make it difficult to budget and may lead borrowers to take on additional debt.
While ARMs and fixed-rate mortgages are similar, the right one for you will depend on your unique financial circumstances and goals. The best way to determine which mortgage is the right fit for you is to explore your options and compare the pros and cons of each.
Fixed Rate Loan
A fixed-rate loan is a type of mortgage that features an interest rate that does not change over the life of the loan. This makes it a popular choice for homebuyers and other borrowers.
These loans are commonly used for the purchase of homes and commercial property. Typically, these loans feature terms of 15, 20, or 30 years. These terms are often flexible, so borrowers can choose a shorter term if they prefer that.
Many borrowers prefer fixed-rate loans because they allow them to predict their future costs and monthly payments accurately. Because these loans are backed by the value of the property, they also provide peace of mind for borrowers.
Some fixed-rate loans are fully amortizing, so borrowers only pay the interest charged to them until they begin to pay back the principal. This can help borrowers save money by eliminating the need for balloon payments at the end of the term.
Another benefit of fixed-rate loans is that a borrower can be confident that their payments will not increase over time, regardless of changes in the market. In contrast, a variable-rate loan is not backed by a property and could increase in size or amount during the loan term.
However, a fixed-rate loan may be more expensive than a variable-rate loan in the long run, so it is important to weigh your options before choosing one. Variable-rate loans tend to be more favorable in times of low interest rates, and can be beneficial for borrowers who expect their income to grow over time or who have a large amount of unused cash on hand that they can use to make extra payments.
Finally, adjustable-rate mortgages (ARMs) can be an attractive option for borrowers who don’t plan to keep the loan for a long period of time and don’t anticipate major changes in their financial situation. ARMs typically feature lower initial interest rates than fixed-rate loans, but they can go up significantly over the life of the loan.
Both types of loans have their benefits, so borrowers should consider their unique financial circumstances before making any decisions. If you are unsure whether a fixed-rate loan is right for you, discuss your needs with a qualified mortgage professional to get the information you need.
Adjustable-Rate Loan
An adjustable-rate mortgage (ARM) is a type of home loan with an interest rate that can fluctuate over time. ARMs typically have lower initial rates than fixed-rate loans, but their payments may increase significantly over the life of the loan.
Adjustable-rate mortgages aren’t for everyone, and it’s important to understand the risks involved in this type of loan. They are a good option for buyers who plan on moving often or buying a starter home. But they also can make it harder to budget and could put you at risk of financial ruin if interest rates go up unexpectedly.
ARMs come in three basic forms: hybrid ARMs, interest-only ARMs and payment-option ARMs. Hybrid ARMs have an introductory interest rate that stays the same for a set number of years, and then adjustments are made on a schedule. Usually, this period ranges from five to 10 years.
The first thing to consider when choosing an ARM is the introductory interest rate. These rates are generally called “teaser” rates and can be incredibly low or extremely high, depending on the lender.
Some ARMs don’t include the margin rate in their introductory interest rates, which can lead to a big spike in payments later on. A margin is the extra percentage points lenders add to an index rate to determine an ARM’s interest rate.
Several types of ARMs allow for the adjustment to be based on a financial index, like the Cost of Funds Index, or COFI. This allows lenders to control their risk.
Other ARMs have an introductory interest rate capped, which means the rate can only increase up to a certain percentage once the introductory rate period ends. These caps are usually around 2%, says Parker.
For most borrowers, the introductory interest rate on an ARM is a good deal because it can save them money on their mortgage in the short term. But be sure to read the fine print, as many of these loans have a higher cap on initial adjustments that’s indexed to the length of the introductory period. For instance, the cap on a 3-year ARM is typically 2-3% above the Start Rate, while the cap on a 5-year ARM is 5-6% above the Start Rate.
Second Mortgage
A second mortgage can be a great way to finance large home improvements or make a downpayment on a new property. It can also help to consolidate debt or fund your child’s college education. However, it is important to be aware of the risks involved.
First, a second mortgage typically has higher interest rates than a cash-out refinance. This is because the second mortgage lender takes on more risk than the primary mortgage lender.
Another issue to consider is that a second mortgage can affect your credit score. Generally, it’s best to avoid taking out second mortgages if you have a low credit score.
You can increase your credit score by focusing on paying down existing debt and making all your payments on time. You should also review your credit reports to ensure that they are accurate.
Most lenders will require a good to excellent credit score to qualify for a home equity loan. They will also look at the borrower’s credit history and debt-to-income ratio to determine if they can afford to pay back the loan.
Many homeowners use second mortgages to renovate their homes or add on rooms. Often, the value of the house rises after the renovations are completed.
Some people also use second mortgages to buy a car or take a vacation. This is a big expense and should be carefully thought out, especially if you have significant home equity.
Other people use second mortgages to consolidate high-interest debt, such as credit card debt. They may be able to deduct the interest on their loans from their taxes.
The best reason to use a second mortgage is to increase the value of your home. Whether you plan to sell the home soon or stay there for years, a second mortgage can provide extra funds for major renovations that could help to improve your home’s resale value.
There are two main types of second mortgages – home equity lines of credit (HELOCs) and home equity loans. Both are revolving lines of credit that allow you to draw on the amount you have available, but HELOCs typically offer lower starting interest rates than home equity loans. They also often come with yearly and lifetime rate caps.
