There are so many different types of home loans available these days that they might end up puzzling buyers. Some of these include fixed rate, adjustable rate, interest only and flex. But, according to mortgage experts, virtually every home loan is one of two types. It can either be a fixed rate loan or an adjustable rate loan. Before you start looking for a home, make sure you understand the pros and cons of each type of loan.
Fixed Rate Loans
These loans are more traditional and remain the most common financing method. The advantages are that you always know what amount your mortgage payment will be and you will always have the exact same interest rate until the mortgage is paid off regardless of inflation rates.
With most fixed rate mortgages, your monthly principal and interest payment will not change for the term of the loan, regardless of whether interest rates rise or fall. In exchange for that stability, you may have a higher interest rate than you would with an adjustable rate loan. Fixed rate loans are available with different length terms and usually, the longer the term, the lower your monthly principal and interest payment will be.
Adjustable Rate Loans
Mortgages that have a flexible rate and/or flexible payments are popular during periods of high interest rates or rapidly growing prices. Rates are generally determined according to terms specified by the lender according to short-term Treasury bill rates. This mortgage option can be ideal for buyers whose income is going to increase substantially each year.
FHA/VA Mortgage Loans
Government insured or guaranteed mortgages can make purchases more affordable than conventional loans. Little or no down payment is required and there are slightly better interest rates than the conventional 30-year mortgages. One drawback to a FHA or VA loan is that there is a lower limit on the amount of money that can be borrowed and the VA requires current or past military service.
Balloon Mortgage
Generally used with a short-term loan, balloon mortgages are usually a fixed rate mortgage that is paid back in equal monthly payments with a final “balloon” payment for the remaining balance of the loan. This option offers buyers a lower monthly payment with full tax benefits but there is little or no equity build up. Monthly payments are often comprised of interest only. Buyers often find that a balloon payment can only be met by refinancing or selling the house. This mortgage option can work well for buyers who plan on moving in a short amount of time or are confident of the short-term property appreciation.
Shared Appreciation Mortgage
Short appreciation mortgage is not a common mortgage but is an option for parents or other family members who wish to help a relative purchase a home. The buyer will then be indebted to two parties and conventional financing may be easier to qualify for. In this method, an arrangement is made in which a third party investor provides a percentage of the down payment. The third party also retains the same percentage of ownership and appreciation of the home. The occupant or buyer can buy out the third party at a later date.
Conventional Mortgages
Conventional mortgages require a minimum of 20% down but if you can’t afford a 20% down payment, ask your lender about private mortgage insurance. Designed to protect the lender against borrower default, private mortgage insurance allows you to obtain traditional financing with a lower down payment.
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