Which Mortgage is Right for Me?
As you shop for a new home, you may notice that there is an overwhelming amount of options at your disposal. The style of the house, the amount of rooms, and the extra square footage are just a few of the choices you need to make. The same range of choices also presents itself when it's time to choose the best mortgage for you.
The the types of mortgages have many names and variables, including the interest rate and loan term. As you shop through different lenders, it's important to understand the loan term options available to you. Here are the most popular mortgage types explained in plain English, their advantages and disadvantages and how to know if it's right for your mortgage needs.
What are Fixed Rate Mortgages?
For the conservative borrower, the fixed rate mortgage is perhaps the most common type of home loan. It gets paid off over a set amount of time (15, 20, 30 years), at a set interest rate so the borrower always knows what to expect. There is comfort in the fact that market rates will rise and fall, but the interest rate remains constant. This is the real selling feature of this mortgage type. It is ideal for those home buyers that are purchasing their forever home, or at least plan of settling in for many years.
• 30-Year Fixed Rate Mortgage: One of the more common fixed rate loan options is the 30-year loan. It's ideal for homeowners who are looking to settle down. Families with children often choose this type of loan term for its smaller monthly payments. The fixed rate of the loan will remain in place throughout the entire 30-year span, thereby affording a consistent payment amount each month.
• 15-Year Fixed Rate Mortgage: If you've recently acquired a high-paying job or are looking to pay off your home as quickly as possible, you may want to consider a 15-year fixed mortgage. Because of the larger payments and quicker payoff, a 15-year fixed rate mortgage will also come with lower interest rates than a 30-year mortgage. This type of mortgage payment is ideal for people who come into large sums of money through settlements, winnings, or family inheritance.
|Predictable monthly payments||Can pay over market rates over time|
What's a Balloon Mortgage?
A balloon mortgage is similar to a 30-year fixed rate mortgage for the first 5 to 7 years. This means that you will have traditional payments and interest rates that remain the same. Once this set period has passed, the remaining balance of your home is due. That remaining balance is a large sum of money, hence the term "balloon payment." This final payment will give you complete ownership of the home and many use this option to quickly pay off a home. If you cannot afford to make the balloon payment at the end of the loan, you can refinance the mortgage at the current interest rate and extend the balloon payment date.
|Lower interest rates||Large final payment|
|Lower monthly payments|
What are Adjusted Rate Mortgages – (ARMS)?
|Can qualify for larger loans||Rate increase|
|Low interest rates||May need to rely on refinancing|
|Good for buyers with low credit|
If you're looking for a lower rate to start off, an adjustable rate mortgage may be your best option. This type of mortgage starts off with a low interest rate that is guaranteed for a fixed amount of time. After that time has passed, the interest rate may rise or fall based on current housing markets. If you're planning on living in the home for less than 10 years, an ARM can provide you with low interest rates during the majority of that time. It will allow you to save money and pay more toward the principal of the home.
What's a Government-Backed Mortgage?
|Federal Housing Administration: FHA Loans||First time buyers with low down payments|
|Veteran Affairs: VA Loans||Military loans with no down payment and other perks|
|United States Department of Agriculture: USDA Loans||Rural homes with no down payment and below market rates|
- Requirements are less stringent than those for conventional loans
- Government-backed loans only require low down payments.
- Government-backed loans are competitive and offer low interest rates.
- With FHA loans, you are required to pay upfront mortgage insurance premium (MIP) which is 1.75% of the mortgage. You are also required to pay for mortgage insurance throughout the loan.
- Complex process requiring a lot more paperwork than a conventional loan.
Going over your loan term options will help you make an informed decision. Choose the type of home loan that makes the most sense with your budget and long-term goals. Once you’ve reviewed all the loan terms, be sure to browse reviews and explore the different rates and options provided by top lenders. You can then ask yourself, "Which mortgage is right for me?"