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Home Buying 101 -- The Different Types of Mortgages
When it comes to buying a home, there's a lot to learn about
mortgages and credit. The terminology comes at you pretty fast,
and when the terminology is new to you, it can all seem
overwhelming. This article will help you make sense of it all.
Fixed Rate Mortgage
A fixed-rate mortgage offers an interest rate that will never
change over the life of the loan. The primary benefit is that if
interest rates increase during the term of your loan, your rates
stay the same.
On the other hand, if interest rates drop during the term of
your loan, your rates still stay the same (unless you refinance
your home at the lower rate). This is the biggest difference
between this loan and variable / adjustable loans (see next
item).
The length (or "term") of a fixed-rate mortgage can be 15, 20 or
30 years. Each of these terms has its pluses and minuses:
30-year fixed rate - The 30-year term gives you maximum
tax advantage by having the greatest interest deduction. It's
also worth noting that the 30-year fixed-rate loan is often the
easiest type of loan to qualify for.
20-year fixed rate - If you shorten your mortgage, you
usually get a lower interest rate. The 20-year mortgage is not
as common as the 30-year, so you'll have to shop around to go
this route.
15-year fixed rate - Same benefits as the 20-year term
(quicker payoff, lower rates), but will increase the monthly
amount you pay.
Adjustable Rate Mortgage (ARM)
The adjustable rate mortgage (or "ARM") offers a fixed initial
interest rate with a fixed initial monthly payment. "Initial" is
the key word here, because after some predetermined initial
period, the loan is subject to changes in market conditions.
The initial interest rate you pay will probably be lower than a
fixed-rate mortgage; but the uncertainty, of course, comes after
the initial period. This type of loan is usually a good option
for buyers who only plan to stay in a home for a short while.
In other words, if you turn around and sell the house before the
initial fixed-rate period expires, you'll benefit from the lower
rate and be out before the uncertainty sets in.
How often the interest rate adjusts with an ARM depends on the
terms of the loan. Take the 5/1 ARM as an example. 5/1 means
your interest rate would stay the same for the first five years
and then adjust each year starting at the sixth year. A 3/3 ARM
would offer an initial fixed rate for three years and would then
adjust every three years starting at the fourth year.
Balloon Loan
The balloon loan is a short-term, fixed-rate loan that lets you
make small payments for an introductory period of time. After
the introductory period - usually five, seven or ten years - you
must refinance or pay off the remaining balance with one
lump-sum ("balloon") payment.
Government Loans (FHA, VA, RHS)
FHA Loan - A loan insured by the Federal Housing
Administration, open to all qualified homebuyers. There are
limits to the size of FHA loans, but they are usually enough to
cover most moderately priced homes. FHA loans also offer low
down payments (usually 3-5 percent).
VA Loan - A long-term, low or no-down-payment loan
guaranteed by the Department of Veterans Affairs. Because this
loan is insured by the VA, it has the added benefit of zero down
payment. This type of loan is only available to qualified
military veterans who have obtained a certificate of eligibility
from the Department of Veterans Affairs.
RHS Loan - The Rural Housing Service (RHS) loan offers
low interest rates with no down payment. It is available to
households with low to moderate income located in rural areas or
small towns.
About the author:
Brandon Cornett is the editor of HomeBuyingInstitute.com, one of
the Internet's largest and most respected libraries of home buying
information -- more than 100 expert articles in 12 different
home buying categories! Put this knowledge to use by visiting http://www.HomeBuyingIn
stitute.com.
Written by: Brandon Cornett
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