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Types of Mortgages
There are basically two types of Mortgages: Fixed-Rate Mortgages and Adjustable-Rate Mortgages. The interest rate remains fixed with the Fixed-Rate Mortgages for the entire period of the loan. Commitment period is typically 10, 15, 20, or 30 years. The longer the loan, the lower the payments, but you pay more on interest rates. This type of loan is good when you know in advance that you will be able to maintain your payments regularly. This is the most common loan arrangement in the US, since the down payments are predictable. The disadvantage is that if the current mortgage rate falls, there is nothing much you can do about it. Only option left is refinancing, which may be costly. Adjustable Rate Mortgages also called as ARMs, came much later than the Fixed Rate Mortgages. They reflect the market rate. Here the initial rate is kept low but the rates will change at a designated time such as annually. Interesting part is that the rate depends on the market conditions - so if the market is in good shape you pay less, otherwise more. Of course the rates have a lock-in percentage (ceiling or lifetime cap) beyond which they do not increase. This type of loan is suitable when you know in the coming years the markets will keep up a good shape. What is a ceiling, or lifetime cap? A ceiling is a guarantee that your interest rate will never exceed a designated percentage. For instance, if your introductory rate was 5% and you have a lifetime cap of 6%, it means that your interest rate can never increase more than 6% during the life of the loan. Your ceiling would be 11%. What happens is those who expect to stay put for many years in their new home prefer the fixed-rate mortgages, whereas others who expect their property to grow in value and who hope to sell it in the near future choose adjustable-rate mortgages. A combination of fixed and adjustable mortgages is called Hybrid Loans. If you want to decide which one is the best for you - think about the following: 1. Total
cash you can afford for down payment every month. We always recommend Short Term Mortgages. There is no need to keep paying your payments for as long as 30 years. Opt for a period of 20, 15 or even 10 years. Agreed, a 30-year term has low payments but you pay more on interests. With the Adjustable Rate Mortgages things are a bit different. Rates can change every six months, annually, once every three years or whenever the mortgage dictates. Your ARM will stipulate a percentage cap for each adjustment period, which means your interest may not increase beyond that percentage point. You may even see your payment decrease if interest rates fall. And if the markets are steady, your rates may not increase at all. So again, which one is better? With a lower initial interest rate (usually 2% to 3% lower than fixed-rate mortgages), qualifying is easier and the payments are more manageable at first. You may
qualify for a larger loan than you would with a fixed-rate
mortgage. If you expect regular pay increases that would cover the increase in your interest, or if you believe interest rates will fall, an ARM might be the wiser choice. VA Loans - A VA loan is simply a fixed-rate mortgage with a very competitive interest rate. Qualified buyers can also use a VA loan to purchase a home with no money down, no cash reserves, no application fee and reduced closing costs. Some states allow a VA loan for refinancing as well. FHA Loans - FHA loan is designed to make housing more affordable for first-time home-buyers and those with low to moderate income. In most US states, both fixed and adjustable rate FHA loans are available, In most states, an FHA loan can be used for refinancing. The difference is, they're insured by the US Department of Housing and Urban Development (HUD). With FHA Insurance eligible buyers can put down as little as 3% of the FHA appraisal value or the purchase price, whichever is lower. Qualifying standards are not as strict and the rates are slightly better than with conventional loans. Note that some adjustable-rate mortgages allow you to convert to a fixed rate at certain specified times. You may have to pay a substantial fee to it, but it definitely minimizes the risk of fluctuating interest rates. Your new fixed rate may be higher than the going fixed rate. Two-Step Mortgages - This is a kind of Adjustable Rate Mortgage that only adjusts once at five or seven years, then remains fixed for the duration of the loan. You will benefit from the lower rate of the initial years, but later you pay more. Convertible Loans - Another ARM choice, the convertible loan offers a fixed rate for the first three, five or seven years then switches to a traditional ARM that fluctuates with the market. If you strongly believe that interest rates will fall a convertible loan might be a smart move. Balloon Mortgages - These short-term loans begin with low, fixed payments. Then, in five, seven or ten years a single large payment (balloon) for all remaining principal is due. Graduated Payment Mortgages (GPM) - With a GPM you pay smaller payments that gradually increase and level off after about five years. Lower payments can make it possible for you to afford a bigger home, but they'll be interest-only payments, adding nothing to the principal. This could put you in a negative amortization situation. Again the same question - which type of mortgage is good for you? The truth is, only you can decide. Determining the most suitable mortgage will depend on your financial circumstances now and for the foreseeable future, and whether you believe that mortgage rates will remain stable or are likely to fluctuate. You need to be certain that you can afford to repay the loan you're taking on, not just today, but throughout the term of the mortgage. It is very important to ensure that your advisor knows the market very well. We have made sure only the experienced mortgage companies make to our list. If you require help, most of the firms listed with us offer FREE HELP and ADVISE. You can contact them for free advice. But first you must fill the forms of as much mortgage companies as possible. This will help you to get help from all sources based on which you can take a decision. We wish you the very best! With
us you Save Hundreds of Dollars Each Month. |
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