Most prospective homebuyers need a loan to complete their purchase. Lenders offer various types of mortgages that appear to make loans more accessible or affordable. In determining the most suitable loan, learn and examine the features, benefits and risks involved and consider your personal and financial condition before making a final decision.
Keeping It Steady
A fixed-rate mortgage offers you the same interest rate and same monthly payment throughout the loan’s life. These loans are suited to buyers with a regular, steady income. With the same monthly payment, you can plan your budget more easily. Having a locked-in rate shields you from increases in market rates; you then can refinance when interest rates fall to get a lower monthly payment.
Peaks and Valleys
With an adjustable-rate mortgage, your mortgage payment rises or falls with the interest rates. Initially, your interest rate and payment are lower than those for fixed mortgages. Rates change at specified points, which can be monthly, quarterly, annually or every three years depending on the loan terms. The lender uses a market index, such as the U.S. Treasury, and a margin set by the lender to set their rates. If you get an adjustable-rate mortgage, your monthly payments could increase significantly over the life of the loan, although your loan likely will have caps on rate spikes and a lifetime cap on the mortgage rate.
An interest-only mortgage offers you an initially lower monthly payment -- because you are paying nothing toward the principal of your loan. As a result, interest-only payments add nothing to your equity in the home. The interest-only period lasts from three to ten years, depending on your lender. After that initial period, your payments increase -- even if the rate doesn’t -- because you are now paying principal as well as interest. The Dodd-Frank Act and federal regulations have made interest-only loans much harder to obtain; borrowers are required to demonstrate their financial ability, based on documented income and other factors, to make the loan payments when the interest-only period ends.
Less than 20 Percent Down
Private-mortgage insurance allows buyers to obtain a loan with less than the traditional 20 percent down payment. PMI covers the lender for its losses should you default on your loan. Generally, if you have been current on payments, you can ask the lender to cancel PMI when your loan falls to 80 percent of the home’s price, or original value. Typically, when the loan is paid down to 78 percent of the original value, the lender must cancel PMI even if you don’t ask.
Backed by Uncle Sam
Government programs can help you buy a home with less than 20 percent down. For as little as a five-percent down payment, you can get a mortgage guaranteed by the Federal Housing Administration; unlike conventional, or non-governmental, mortgages, you must pay for mortgage insurance for the entire time you have the loan. Veterans and prospective home buyers of limited income who choose to purchase and live in homes rural areas can get government-guaranteed loans with no down payment if they qualify.
- MyFICO.com: Mortgages: Choose the Home Mortgage That Makes Sense for You
- Brigham Young University: Marriott School: Personal Finance: Types of Mortgage Loans
- The Federal Reserve Board: Consumer Handbook on Adjustable-Rate Mortgages
- Federal Deposit Insurance Corporation: Interest-Only Mortgage Payments and Payment-Option ARMS -- Are They for You?
- Consumer Finance Protection Bureau: Summary of the Ability-to-Repay and Qualified Mortgage Rule and the Concurrent Proposal
- North Seattle Community College: Financing Residential Real Estate: Lesson 10 -- Conventional Financing
- Department of Housing and Urban Development: HUD No. 13-010 -- FHA Takes Additional Steps to Bolster Capital Reserves
- Department of Agriculture: Rural Development: Single Family Housing Guaranteed Loan Program
- Veterans Administration: Benefits: VA-Guaranteed Home Loans for Veterans
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.