homebuyer has more financing options than have ever
been available before. From traditional mortgages
to adjustable-rate and hybrid loans, there are financing
packages designed to meet the needs of virtually anyone.
While the different
choices may seem overwhelming at first, the overall
goal is really quite simple: you want to find a loan
that fits both your current financial situation and
your future plans. Though this article discusses some
of the more common loan types, you should spend time
talking with different lenders before deciding on
the right loan for your situation.
categories of loans
Most loans fall into three major categories: fixed-rate,
adjustable-rate, and hybrid loans that combine features
As the name implies, a fixed-rate mortgage carries
the same interest rate for the life of the loan.
Traditionally, fixed-rate mortgages have been
the most popular choice among homeowners, because
the fixed monthly payment is easy to plan and
budget for, and can help protect against inflation.
Fixed-rate mortgages are most common in 30-year
and 15-year terms, but recently more lenders have
begun offering 20-year and 40-year loans.
Adjustable-rate mortgages differ from fixed-rate
mortgages in that the interest rate and monthly
payment can change over the life of the loan.
This is because the interest rate for an ARM is
tied to an index (such as Treasury Securities)
that may rise or fall over time. In order to protect
against dramatic increases in the rate, ARM loans
usually have caps that limit the rate from rising
above a certain amount between adjustments (i.e.
no more than 2 percent a year), as well as a ceiling
on how much the rate can go up during the life
of the loan (i.e. no more than 6 percent). With
these protections and low introductory rates,
ARM loans have become the most widely accepted
alternative to fixed-rate mortgages.
Hybrid loans combine features of both fixed-rate
and adjustable-rate mortgages. Typically, a hybrid
loan may start with a fixed-rate for a certain
length of time, and then later convert to an adjustable-rate
mortgage. However, be sure to check with your
lender and find out how much the rate may increase
after the conversion, as some hybrid loans do
not have interest rate caps for the first adjustment
period. Other hybrid loans may start with a fixed
interest rate for several years, and then later
change to another (usually higher) fixed interest
rate for the remainder of the loan term. Lenders
frequently charge a lower introductory interest
rate for hybrid loans vs. a traditional fixed-rate
mortgage, which makes hybrid loans attractive
to homeowners who desire the stability of a fixed-rate,
but only plan to stay in their properties for
a short time.
A balloon payment refers to a loan that has a large,
final payment due at the end of the loan. For example,
there are currently fixed-rate loans which allow homeowners
to make payments based on a 30-year loan, even thought
the entire balance of the loan may be due (the balloon
payment) after 7 years. As with some hybrid loans,
balloon loans may be attractive to homeowners who
do not plan to stay in their house more than a short
period of time.
as a factor in your loan choice
As has been discussed, the length of time you plan
to own a property may have a strong influence on the
type of loan you choose. For example, if you plan
to stay in a home for 10 years or longer, a traditional
fixed-rate mortgage may be your best bet. But if you
plan on owning a home for a very short period (5 years
or less), then the low introductory rate of an adjustable-rate
mortgage may make the most financial sense. In general,
ARMs have the lowest introductory interest rates,
followed by hybrid loans, and then traditional fixed-rate
and VA loans
U.S. government loan programs such as those of the
Federal Housing Authority (FHA) and Department of
Veterans Affairs (VA) are designed to promote home
ownership for people who might not otherwise be able
to qualify for a conventional loan. Both FHA and VA
loans have lower qualifying ratios than conventional
loans, and often require smaller or no down payments.
Bear in mind,
however, that FHA and VA loans are not issued by the
government; rather, the loans are made by private
lenders but insured by the U.S. government in case
the borrower defaults. Remember too, that while any
U.S. citizen may apply for a FHA loan, VA loans are
only available to veterans or their spouses and certain
A conventional loan is simply a loan offered by a
traditional private lender. They may be fixed-rate,
adjustable, hybrid or other types. While conventional
loans may be harder to qualify for than government-backed
loans, they often require less paperwork and typically
do not have a maximum allowable amount.