When choosing the best type of mortgage loan there are many options available to homebuyers. The most popular mortgages can be divided into two main categories to help simplify the choices. Mortgages that offer fixed interest rates and a fixed monthly payment, and some mortgages offer plans where either or both of those factors are adjustable.
FIXED RATE/FIXED PAYMENT
These loans are more traditional and remain the most common financing method. The advantages are obvious - 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.
There are "30 year fixed rate" mortgages and "15 year fixed rate" industry options refer to the number of years the loan is to be paid back. Both offer considerable tax benefits but the 30-year plan has a slower equity build-up.
FLEXIBLE RATE MORTGAGES
Mortgages that have a flexible rate and/or flexible payments are popular during periods of high interest rates or rapidly growing prices.
Real estate specialists will refer to one mortgage option as the "ARM" or Adjustable Rate Mortgage. The ARM offers lower-than-market initial interest rates and payments can decrease or increase over time. 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 marginally 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 buildup. 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
SAM is not a common mortgage but is an option for parents or other family members who wish to help a relative purchase a home. Ultimately the buyer is 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, allowing them home-ownership with less cash down.
CONVENTIONAL MORTGAGES
Conventional mortgages require a minimum of 20% down but If you can't afford a 20% down payment ask your lender about PMI, or private mortgage insurance. Designed to protect the lender against borrower default, PMI allows you to obtain traditional financing with a lower down payment sometimes as low as 5%.
As with an FHA insured loan, you must pay premiums for PMI coverage. This coverage is determined by the type and amount of your loan. The maximum loan amount is determined by your lender and can be included in your monthly loan payment if you wish.
OTHER BUYING OPTIONS
We have only touched briefly on the most basic mortgages. There are excellent home buying options for first time home buyers including CHAMP but be aware that all mortgage companies in your area may not be authorized to write a CHAMP loan.
You can also check into options where buyers can save money by performing sweat-equity. There are also mortgages available where homeowners can receive government subsidy to purchase an existing home or even build a new home in a rural area. There are many requirements that must be met for this rural housing program and the other alternative options mentioned so check with your local real estate agent to see if they are a good option for you.
