Types of Mortgages

 

Types of Mortgages

Fortunately for buyers, there are a variety of mortgages to choose from. It is in your best interest to investigate each of them to determine which is the best for your situation. You probably won’t qualify for all of them. In fact, you may only qualify for one. But if you do qualify for more than one, you may save yourself money (and worry) in the long run if you do your homework before signing on the dotted line.

Fixed Rate Mortgages

15-Year Fixed-Rate:

  • Pay off the loan in half the time of a 30-year loan.
  • Equity builds up more quickly than in a 30-year loan.
  • Payments are higher (which may be a problem if you lose your job or become unable to work).

20-Year Fixed-Rate:

  • Pay off the loan in 2/3 the time of a 30-year loan.
  • The overall interest paid is considerably less than for a 30-year loan.

30-Year Fixed-Rate:

  • The most common choice, especially for first-time homebuyers, as it’s the easiest of the fixed-rate loans to qualify for.
  • Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of “padding” between the amount you can afford to spend and the monthly payment for your desired property.
  • More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
  • For income tax purposes, this term provides the maximum interest deduction.

Adjustable-Rate Mortgages (ARMs)

If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate.

Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly.

Fortunately, the amount an ARM can increase is limited. There are “caps” on how much your lender can increase your rate, both for a period of one year and for the life of the loan.

Convertible ARMs

If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.

Government Loans

Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.

  • VA Loans: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
  • FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase “FHA approved” when looking at ads for homes.

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