If you’re looking to buy a home, there are several different types of mortgages available. Understanding them can help you make an informed decision about which loan is best for your needs.
Fixed-rate mortgages are typically the most popular type of mortgage for home purchases. However, adjustable-rate mortgages (ARMs) also exist.
Fixed-rate mortgage
A fixed-rate mortgage is a type of home loan that has a set interest rate throughout the life of the mortgage. This is different from an adjustable-rate mortgage (ARM) or home equity loan, which have rates that fluctuate over time.
A mortgage lender sets the interest rate on your loan, based on a variety of factors, including the movements of Treasury bonds, market trends and your credit score and income level. Once youve agreed to the loan terms, there is no way to change your interest rate unless you refinance your mortgage later.
Many homeowners choose to get a fixed-rate mortgage because they want to avoid the risk of an increase in their monthly mortgage payments when interest rates rise. They also prefer the security of knowing their payments will be fixed for the life of their loan.
However, you should consider all the pros and cons of fixed-rate mortgages before deciding on one. The pros include the fact that these loans have a predictable payment amount and are relatively easy to understand.
These loans also tend to have low initial costs, which can save you money down the road. They also generally come with a low introductory interest rate, which is lower than the rate on an ARM.
The downside to these types of loans is that they arent as flexible as ARMs, and you might find it hard to get a lower rate or shorter term. ARMs are also typically more expensive than fixed-rate mortgages, especially when you consider their initial cost.
Most fixed-rate mortgages have a term of 10 to 30 years, although some lenders let you customize your mortgage with a shorter or longer term. The longer the term, the higher the interest rate and the more youll owe at the end of the loan.
You can also choose to contribute additional money toward your principal each month, which will shorten the time it takes to pay off your mortgage. But its important to check with your lender before making any changes, because some lenders have prepayment penalties and wont allow you to make extra payments that dont contribute to your principal.
Adjustable-rate mortgage
Adjustable-rate mortgages, or ARMs, are popular among home buyers because they offer an introductory rate that can be much lower than the interest rates available on fixed-rate loans. However, borrowers should understand that an ARM’s interest rate can be subject to changes during the loan’s lifetime.
ARMs typically come with an initial period during which the interest rate is fixed for a specified time, followed by an adjustment period, when the interest rate can change based on market fluctuations. The duration of the initial period and how often in a year your ARM will adjust are determined by the type of ARM you choose.
Many ARMs feature caps, which limit how much your interest rate can increase from one adjustment period to the next and how much it can rise over the lifetime of the loan. These caps can be as high as 5% for an initial period and 2% for the entire life of the loan.
Another common type of ARM is the hybrid ARM, which begins with a fixed rate for a number of years (usually three to 10) and then adjusts up or down on a preset schedule. An interest-only ARM, which lets you pay only the interest portion of your mortgage for a set amount of time before the loan switches to a regular interest-and-principal payment, is also available.
Finally, there are payment option ARMs, which allow borrowers to choose their repayment term based on their financial situation and budget. They usually start with a fixed interest rate for a number of years and then adjust up or down on a predetermined schedule, such as once a year.
While adjustable-rate mortgages can help borrowers build their credit scores, they also pose the risk of a higher monthly payment if the interest rate increases during the life of the loan. Because ARMs can be more complicated than fixed-rate loans, home buyers should be aware of the potential risks and take steps to minimize them.
As with all types of mortgages, ARMs aren’t right for everyone. If you’re a first-time homebuyer and have limited cash available for a down payment, consider a traditional fixed-rate mortgage instead.
Balloon payment mortgage
If you’ve been thinking about getting a home loan, you might have heard the term “balloon payment mortgage.” This type of mortgage is different from other types of loans because it requires you to make one large lump sum payment at the end of the loan term.
Most other mortgages are fully amortizing, which means you pay down the amount you owe over time, gradually. But balloon mortgages require you to pay off the entire balance at the end of the loan term in one large payment, which can be a major financial burden for some homeowners.
The best way to avoid a balloon mortgage is to apply for a standard loan, which requires you to make monthly payments that gradually reduce the balance of your loan over time. You also have the option of refinancing a balloon mortgage, which can provide you with more time to pay off your loan and lower your overall interest rates.
Refinancing a balloon mortgage is often a good idea if you have enough equity in your home to qualify for another loan, or if the value of your home has increased since you originally took out the loan. You’ll need to meet the same qualifying criteria you did when you first got the loan, including a credit score of at least 620 and proof of steady income.
However, it’s important to note that you may not be able to refinance the loan if your property has lost value or you’ve had financial trouble. In addition, you’ll need to go through a new underwriting process, pay fees and get new appraisals or inspections.
If you’re unable to refinance, you can try saving enough money to cover the payment. This is especially useful if you’re confident that you’ll come into a large amount of cash before your final balloon payment is due.
Alternatively, you can sell your home before the balloon payment is due. This will allow you to use the sale proceeds to pay off your balloon mortgage, which can help you avoid making the big lump-sum payment at the end of the term.
Jumbo mortgage
Jumbo mortgages are used to finance homes that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. Typically, they are a great option for homebuyers in high-priced areas who may be struggling to qualify for traditional mortgages.
Because of their size and risk, jumbo mortgages require borrowers to meet stricter criteria than conventional mortgages. To qualify for a jumbo mortgage, you should have a high credit score and be able to show that you can afford your payments. You also should have a substantial amount of savings saved up to cover the costs associated with a jumbo mortgage.
In most cases, a jumbo mortgage will require you to have a larger down payment than a conventional loan. Some lenders also have requirements for a low debt-to-income ratio, which is the percentage of your monthly income that goes toward debt payments.
While jumbo mortgages are a great option for homebuyers who have a large down payment and a good credit score, they can also be difficult to obtain. They also tend to carry higher interest rates than conforming loans, which will vary by lender and your personal financial situation.
If you are interested in getting a jumbo mortgage, it is best to shop around for the best rates and terms. This will help you get the most out of your investment and ensure that you don’t end up with a bad deal that will cost you thousands in higher interest payments down the road.
When obtaining a jumbo mortgage, you should remember that it is an unsecured loan. This means that if you default on your loan, the government will take the hit. Therefore, you should always make sure that you can repay your mortgage if you have trouble making your payments.
Another key factor to consider when applying for a jumbo mortgage is your loan-to-value ratio, or LTV. Your loan-to-value ratio is calculated by dividing the purchase price of your home by the amount you borrow to buy it. For example, if your home is valued at $750,000, you would need to bring 20% of that amount to the closing table in order to secure a jumbo mortgage.
