Option 1: Fixed vs. Adjustable Rate
As a borrower, one of your first choices is whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans fit into one of these two categories, or a combination "hybrid" category. Here's the primary difference between the two types:
- Fixed-rate mortgage loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same, month after month, and year after year. It will never change. This is true even for long-term financing options, such as the 30-year fixed-rate loan. It has the same interest rate, and the same monthly payment, for the entire term.
- Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or "adjust" from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. It is therefore referred to as a "hybrid" product. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate. For instance, the 5/1 ARM loan carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. That's what the 5 and the 1 signify in the name.
Pros and cons: adjustable versus fixed-rate mortgages
As you might imagine, both of these types of mortgages have certain pros and cons associated with them. Use the link above for a side-by-side comparison of these pros and cons. Here they are in a nutshell: The ARM loan starts off with a lower rate than the fixed type of loan, but it has the uncertainty of adjustments later on. With an adjustable mortgage product, the rate and monthly payments can rise over time. The primary benefit of a fixed loan is that the rate and monthly payments never change. But you will pay for that stability through higher interest charges when compared to the initial rate of an ARM.
Option 2: Government-Insured vs. Conventional Loans
So you'll have to choose between a fixed and adjustable-rate type of mortgage, as explained in the previous section. But there are other choices as well. You'll also have to decide whether you want to use a government-insured home loan (such as FHA or VA), or a conventional "regular" type of loan. The differences between these two mortgage types are covered below.
A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the three government-backed mortgage types explained below (FHA, VA, and USDA). Conventional loans are available at any local bank and mortgage lender.
Adam's Note: Most buyers that have a good chunk of down payment money elect to go with a conventional loan. Local banks usually like to have a 10%-20% down payment with a conventional loan. This amount of money down will lead to cheaper monthly payments. Also, when you put 15% down, you usually will not have to pay mortgage insurance.
If you're not wanting to put a lot of money down on your house, you will fall into one of these loan categories:
USDA / RHS Loans
The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to "rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing."
Adam's Note: This is the loan type a good portion of my buyers goes with. It is a great loan that is available with no money down. Every property in Logan County and the majority of surrounding counties qualify for a Rural Housing Loan. These loans can still be closed in 30 days with the right loan officer.
FHA Loans
The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price.
Adam's Note: Another great loan option. If you do not qualify for a rural housing loan based on area or income, you will probably qualify for an FHA loan. The typical closing time is 25-40 days.
VA Loans
The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it's a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever.
Adam's Note: I love working with Veterans and I appreciate their service to our country. The VA loan is a great option for all Veterans. With a VA loan, borrowers will not have any mortgage insurance and typically have low-interest rates. The key to getting a VA loan done quickly is getting with a good VA loan officer!
This information came from HomeBuyingInstitue.com
Read more: http://www.homebuyinginstitute.com/mortgagetypes.php#ixzz3xt5FT4jb
