Mortgages from A to Z
When it comes to buying a home, there is an array of mortgage options to choose from. This week we review the variety of mortgages available to homebuyers including fixed-rate mortgages, adjustable-rate mortgages and FHA loans and we weigh in on factors to consider when choosing a mortgage that’s right for you.
An adjustable-rate mortgage (ARM), also known as variable-rate mortgage, is a type of mortgage that has an introductory interest rate that lasts a set period of time and adjusts with the marketplace for the remaining balance of the loan. As interest rates rise and fall, so do consumers’ monthly payments. The possibility of lower monthly payments makes this type of mortgage very attractive to homebuyers. Conversely, while banks reward consumers who bear the risk of the market with an initial lower rate, the possibility of rising rates often deters many homebuyers. However, to protect borrowers, annual and lifetime caps are set in place, which prevents rates from rising above a certain level during a time period.
Adjustable-rate mortgages can be a good option for homebuyers who plan on being in the house a few years allowing them to save money on interest payments in the short run. However, adjustable-rate mortgages aren’t for the faint of heart. Homebuyers who have difficulty budgeting for payment fluctuations or those that may worry about unpredictable rate changes can find these types of mortgages stressful.
A Federal Housing Administration loan is backed by the U.S. Federal Housing Administration (a government agency within the U.S. Department of Housing and Urban Development.) The administration doesn’t give loans, but rather insures loans made by private lenders who are FHA-approved. FHA loans are often the mortgage of choice for those who prefer a lower down payment, as only 3.5 percent is required rather than the traditional 20 percent. However, FHA properties must meet certain conditions and be approved by an FHA-approved appraiser. To be eligible for a FHA loan, recipients must meet a number of requirements such as a certain front-end ratio, back-end ratio and steady employment, among other requirements.
A fixed-rate mortgage, one of the most commonly recognized mortgage options, is a loan in which the interest rate remains the same throughout the payment schedule. According to payoff.com, seven out of 10 people opt for fixed-rate mortgages.
Because fixed-rate mortgages are relatively straightforward with predictable monthly payments, many people opt for this type of plan. It is ideal for consumers who plan to stay in their home for many years and those who prefer the stability of unwavering payments over unpredictable, fluctuating payments.
Unfortunately, these types of loans have their disadvantages. Consumers can’t take advantage of low interest rates and they will end up paying more in interest over the life of the loan as fixed-rate mortgages are geared toward long-term financing.
Although choosing a mortgage can be a complex process, there is an attractive array of mortgage options available that can make the process far more straightforward. Talk to your lender about these mortgages and other available mortgages including veterans’ loans, reverse mortgages and jumbo loans to accurately gauge what type of loan is best for you and your situation.