By Elisabeth Myrick
Today's consumer has many more options for a home mortgage than consumers had a decade ago. Understanding the difference between all the options and determining the best fit for you, based on your lifestyle, is an important step in the home buying process.
Home loans allow the consumer or homebuyer to purchase a home. Most homebuyers do not have the full purchase price of a home saved, so it is necessary to take out a home loan. There are several different types of mortgage loans, such as fixed rate loans, adjustable rate mortgages and interest only mortgages.
It is important to become familiar with all of the mortgage loan options, as well as the different interest rates, terms, fees, etc. associated with each. Understanding these differences and how they relate to your personal financial situation will make a huge impact over the life of your home mortgage, and may save you hundreds or even thousands of dollars.
Fixed rate mortgage
This type of mortgage retains the same annual percentage rate throughout the life of the loan. The most popular term is for 30 years, although 15 and 40 year terms, as well as 50 year mortgages are becoming more popular. These
mortgages allow homeowners the security of knowing the exact amount of their mortgage payment for the life of the loan, from the first payment to the last. The only exception to this is property tax fluctuations.
Adjustable rate mortgage (ARM)
This type of mortgage is based on shorter term securities which fluctuate based on several financial indexes. ARM mortgages typically have lower payments that are attractive to buyers who are looking to qualify for a larger home. These loans also come with the option to convert or
refinance to a fixed rate. This mortgage may also be good if you plan to live in your home for only a few years. Most ARMs also have an interest rate cap on the periodic adjustments for the life of the loan so your monthly payment will never increase over a certain amount. This number is important to find prior to closing.
Interest-only loan
An interest-only loan offers even more affordable monthly payments during the initial interest-only period, which usually lasts no more than five years. During or after the initial period, the homebuyer can refinance or pay off the entire loan amount, which some buyers do by investing the savings in a high-yielding investment during the initial period.
Sub-prime loans
Sub prime loans were designed for borrowers with a lower credit rating and usually come with a much higher interest rate. These loans may also have a balloon payment requiring the buyer to pay off the balance after a specific period of time.
100 percent financing
This mortgage does not require the buyer to place a down payment, but instead finances the entire purchase price of the home. In order to qualify for 100 percent financing, you must have a good credit rating. The homebuyer may also be required to pay private mortgage insurance, or have a piggyback loan.
80/20 or piggyback mortgage
The 80/20 or piggyback mortgage loan is ideal for homebuyers with little or no down payment and it eliminates the need for PMI. With this loan, the homebuyer takes out two loans, one for 80 percent of the purchase price and one for the remaining 20 percent. The 20 percent loan usually has a slightly higher interest rate. One of the benefits to the 80/20 loan is the combined 80/20 payment is typically less than the cost of a loan of greater than 80 percent of the home's value, plus mortgage insurance, especially if the homeowner is able to itemize their deductions on
federal income tax, as mortgage interest is deductible but mortgage insurance is not.
It is important that no matter which type of loan you choose, you make sure the mortgage best fits your financial situation.
