There are many different types of mortgages programs around out there, and new ones
being introduced everyday. I want you
to be informed of some of the most popular ones, as well as some of the pros and cons of each.
It's important to me that you chose the right mortgage that's right for you, and
also fits into your future financial plans too.
Fixed-Rate Mortgages
Adjustable-Rate Mortgages (ARMs)
The Convertible ARM
Balloon Mortgages
FHA & VA Loans (also known as Government Loans)
The fixed-rate mortgage program is probably right for you if you're looking for a mortgage with
payments that will remain essentially unchanged over its term, or if you plan to stay
in your new home for a long time. ut you still have options as to how long you want
to spread the payments out.
With the fixed-rate mortgage programs, the interest rate you pay and the monthly
principal and interest payments are agreed upon from the beginning and will not change
throughout the duration of the mortgage. In other words, the interest rate you close
escrow with will not change and your monthly payments will remain the same each month,
with different portions of that payemtn going to principal and interest, until
the mortgage is paid off. The fixed-rate mortgage is an extremely stable choice as
it protects you from rising interest rates and makes budgeting for the future very easy.
But then again, in certain types of economic climates, interest rates for a
fixed-rate mortgage can be considerably higher than the initial interest rate of
other mortgage options such as ARM's or Interest Only programs.
That is the one disadvantage of a fixed-rate mortgage. Once your rate is set, it doen't
change and if interest rates fall, it will not affect how much you pay.
However, you do have the option of refinancing if interest rates do drop significantly.
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Adjustable-Rate Mortgages (ARMs)
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An adjustable-rate mortgage (ARM) is considerably different from a fixed-rate mortgage. It may be best if you're buying a home while interest rates are high, if you expect increases in your income, or if you don't plan to keep your home very long. Keep in mind, with an ARM, you are taking the risk on the rise or fall of interest rates, not the bank.
In most cases, the initial interest rate of an ARM is lower than a fixed-rate mortgage.
With an ARM, your mortgage rate rises and falls with interest rates. Each lender's interest rates are usually tied to a specific index like COFI, LIBOR, the T-Bill rate, or the CD index. The rate you pay will be based on your lender's index plus a margin, usually two to three points. Ask your lender for specifics. Also ask how the "caps" on your ARM work. "Caps" will limit the amount your lender can increase your interest rate in a single year and over the entire term of the loan.
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A currently very popular option is the convertible ARM. It's a combination of both fixed-rate and adjustable-rate mortgages, offering the best of both options in one package.
The convertible ARM allows you to convert to a fixed-rate mortgage after a set period of time. For instance, you could get a one-year ARM with the option to convert any time after the first through the fifth adjustment period. This way you can initially benefit from the lower interest rate of a standard ARM, and then take advantage of locked-in payments later.
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Another type of mortgage that has become popular in recent years is the balloon mortgage. So-called because it requires you to pay off your loan in full or refinance at the end of the mortgage term (usually five or seven years). The advantage of a balloon mortgage is that your monthly payments during the mortgage term are generally lower than they would be for a traditional 30-year fixed-rate mortgage.
Balloon mortgages are traditionally popular with first-time home buyers with growing families and with individuals who expect to be relocated by the employer. If you anticipate moving in five to seven years, you can take advantage of lower interest rates (sometimes from three-eighths to three-quarters of a percentage point less than traditional fixed-rate loans) for that time period. If you end up staying longer in your residence then you'll have to pay the balance at the end of the term, or more likely, refinance your mortgage at the then-current interest rate. Many lenders also offer an option that allows you to convert to a fixed-rate mortgage, provided certain conditions are met.
Qualifications for a balloon mortgage vary depending on the lender you choose, but most require at least a 20% down payment.
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FHA & VA Loans (also known as Government Loans)
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Veterans may qualify for Veterans Administration mortgages. There are caps on the size of a VA loan you can get, but this loan could be ideal for buying a lower priced home with a small down payment.
FHA or Federal Housing Administration loans are available to Americans with smaller incomes who are buying modestly priced homes. Look for properties that are designated as "FHA approved."
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