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How Many Types of Mortgage Loans Can You Name
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Getting Started - Types of Mortgage Loans
Today, you will find that there are many different
types of mortgages loans available to you. Your challenge is to
select the loan terms that are most favorable to your situation.
If, for example, you anticipate living in your
home for many years, the interest rate may be the main factor in
your decision making process. If you expect to keep the house for
only a short period of time, the closing costs may be more important.
If you want to pay off your mortgage debt by
the time your children start college or you begin your own retirement,
you may wish to consider a shorter term loan such as a 15-year fixed-rate
mortgage. If your retirement is years away, you may prefer to extend
payments over a longer period of time by taking on a 30-year mortgage
loan.
How important is the certainty of a fixed mortgage
payment each month? If you want to make sure your mortgage payment
remains the same every month, then you'll want to focus on various
fixed-rate loans. If you are comfortable with periodic changes to
your mortgage interest rate, then you may be inclined to consider
adjustable-rate mortgages.
Fixed-Rate
Mortgage Loans
The interest rate may be your main consideration
if you expect to stay in your house for a long time. With a fixed-rate
mortgage, you can be sure that your interest
rate will stay the same for the entire life of your loan.
Fixed-rate mortgages are available in a variety of repayment terms,
with 15, 20, and 30 years the most common.
30-Year Fixed-Rate Mortgage Loan
The easiest fixed-rate loan to qualify for, the
30-year mortgage, gives you an excellent opportunity to keep your
mortgage payments reasonable by making monthly payments over a long
period of time. This mortgage loan may be ideal if you plan to remain
in your home for years and wish to keep your housing expense low
and use any extra cash for other purposes. This loan also provides
maximum interest deduction for tax purposes.
15-Year Fixed-Rate Mortgage Loan
The 15-year mortgage offers a lower interest
rate than a 30-year mortgage. Such a shorter-term mortgage will
save you a significant amount of interest over the life of the loan.
By paying off the mortgage more quickly, you also build up equity
in your home sooner. A 15-year mortgage can let you own your home
clear of debt earlier, which may be important if you are approaching
retirement or have other large expenses to cover such as financing
your children's education. However, the monthly payments you make
on a 15-year mortgage will cost you more than those you would make
on a 30-year mortgage loan for the same total mortgage amount.
Adjustable-Rate Mortgage Loan
With an adjustable-rate mortgage (ARM), the interest
rate you pay is adjusted from time to time to follow changing market
rates. This means that when interest rates go up, your monthly mortgage
payments may go up as well. On the other hand, when interest rates
go down, your monthly mortgage payments may also go down.
ARMs are attractive because they may initially offer a lower interest
rate than fixed-rate mortgages. Since the monthly payments on an
ARM start out lower than those of a fixed-rate mortgage of the same
amount, you can qualify for a larger loan. The chief drawback, of
course, is that your monthly payments may increase when interest
rates go up.
You may want to consider an ARM if you are confident
your income will rise enough in the coming years to comfortably
handle any increase in payments. You may also want to consider an
ARM if you plan to move in a few years and are not so concerned
about possible interest rate increases. You may also want to consider
an ARM if you need a lower initial rate to afford to buy the home
you want.
How much your payments can increase will depend on the terms of
your mortgage. Before applying for an ARM, be sure you know how
high your monthly payments could go -- the so-called "worst-case
scenario." An ARM usually has two "caps" or limits on how large
an interest rate increase is permitted: One cap sets the most that
your interest rate can go up during each adjustment period and the
other cap sets the maximum total amount of all interest adjustments
over the life of the loan.
A typical ARM that adjusts annually, for example,
may cap the yearly interest rate increases at 2 percent, meaning
that the adjusted interest rate can never be more than 2 percent
higher than the previous year. And such an ARM may have a
lifetime
rate cap of 5 percent, meaning that the highest adjusted
interest rate you can ever be required to pay is no more than 5
percent above the original rate. So, if you are looking at an ARM
with a current introductory rate of 6 percent, a lifetime cap of
5 percent tells you that the highest interest rate you could ever
pay would be 11 percent. Only you can determine if you would feel
comfortable paying this interest rate sometime in the future.
Some Arms offer a conversion feature, which allows
you to convert from an adjustable-rate to a fixed-rate loan at certain
times during the life of your loan. Ask your lender about this feature
when researching Arms
One important thing to know when comparing Arms
is that the interest rate changes on an ARM are always tied to a
financial index. A financial index is a published number or percentage,
such as the average interest rate or yield on Treasury bills. The
most common types of Arms are listed below.
CD-Indexed Arms (Certificate
of Deposit)
These Arms adjust to a Certificate
of Deposit (CD) index. After an initial period, the initial
rate and payments adjust on a periodic basis. These Arms typically
come with a per-adjustment cap of 1 percent and a lifetime rate
cap of 6 percent. Some of these Arms offer an option to convert
to a fixed-rate mortgage at specified interest adjustment dates.
Treasury-Indexed
Arms
These Arms are typically indexed to the weekly
average yield of U.S. Treasury securities adjusted to a constant
maturity of six months, one year, or three years. Depending on which
three of these security index schedules you choose, the interest
rate on your ARM will adjust once every six months, once each year,
or once every three years. Per-adjustment caps and lifetime rate
caps vary, depending on the type of
Treasury-indexed
ARM you choose. Some of these Arms offer an option to convert to
a fixed-rate mortgage at specified interest adjustment dates.
Cost of
Funds-Indexed Arms
Cost
of Funds-indexed (COFi) Arms are indexed to the actual costs
that a particular group of institutions pays to borrow money. The
most popular index of this type is the COFi for the 11th Federal
Home Loan Bank District. COFi Arms can adjust every month, every
six months, or every year and the per-adjustment caps and lifetime
rate caps vary, depending on the type of COFi ARM you choose. Some
of these Arms offer an option to convert to a fixed-rate mortgage
at specified interest adjustment dates.
LIBOR-Based Arms
The London Interbank Offered Rate (LIBOR) is
the interest rate at which international banks lend and borrow funds
in the London interbank market. You may choose an ARM that adjusts
to the LIBOR every six months. This six-month LIBOR ARM typically
has a per-adjustment
period cap of 1 percent and is offered with either a 5 percent
or a 6 percent lifetime rate cap. It can offer the option to convert
to a fixed-rate mortgage.
Initial Fixed-Period
Arms
You may wish to look into a special type of ARM
that doesn't adjust your interest rate until several years after
you take out the loan. These loans offer you several years of fixed
payments before there is an interest rate change. You can get a
three-, five-, seven-, or ten-year fixed-period ARM. This means
your interest rate would be the same for the first three, five,
seven, or ten years and then, at the end of your chosen fixed-rate
period, your interest rate would adjust every year. This type of
ARM protects you against rapid interest rate increases in the early
years of your loan.
Government Loans
The Federal
Housing Administration (FHA), the U.S.
Department of Veterans Affairs (VA), and the
Rural
Housing Services (RHS) are three agencies that offer government-insured
loans. To obtain these loans, you apply through a lender that is
approved to handle them. All require that the properties being purchased
meet certain minimum standards.
Here is some more information about various government loan programs:
FHA Loans
With FHA insurance, you can purchase a home with
a very low down
payment (from 3 percent to 5 percent of the FHA
appraised
value or the purchase price, whichever is lower). FHA mortgages
have a maximum loan limit that varies depending on the average cost
of housing in a given region.
VA Loans
The VA guarantee allows qualified veterans to
buy a house with no down
payment. Moreover, the qualification guidelines for VA loans
are more flexible than those for either FHA or conventional loans.
If you are a qualified veteran, this can be an attractive mortgage
program. To determine whether you are eligible, check with your
nearest VA regional office.
RHS Loans
The Rural Housing Service, a branch of the U.S.
Department of Agriculture, offers low-interest-rate home ownership
loans with no down payment requirements to low and moderate income
persons who live in rural areas or small towns. Check with your
local RHS
office or a local lender for eligibility requirements.
Affordable
Housing Loans
For households of modest means, the greatest
barriers to home ownership are coming up with the
down
payment and closing
costs and managing housing expenses that often are higher
than those of the qualifying guidelines allowed in traditional mortgage
lending.
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