Not unless you have the cash to purchase a new home, which is not common, the majority of people opt to take on a mortgage when buying a house. Being a massive decision in your life, you need to be aware of all the different types of mortgage loans available for you.
Choosing one is not as easy as it may seem as mortgage loans vary a lot, from interest rates and repayment terms, among other factors. Below are some of the loans you should be aware of before settling for the one that best suits you.
Fixed-rate Mortgage
This is the most known mortgage loan. With a set interest rate, the monthly payments are more predictable and spread over a set time range, usually between 15 and 30 years. Most people prefer short term loans these days, and they were gaining more and more popularity as per a report from the USA today back in 2011.
They unveiled that up to 34% of refinancers chose to shorten they loans from 30 years to 15 and 20 years. This is because the shorter the payment period, the lower the interest rates, and it is also the rest involved to the lender on a short term loan is less. You end up paying less interest over 15-year mortgages as compared to a 30 year one.
In 2016, Freddie Mac noted that close to 90% of people buying homes went for the typical 30 years mortgage. This is so as most people are comfortable paying over the long period this loan offers and also you can get a bigger or more comfortable home.
The 20-year mortgage has a lot in common with the 30 years one the only difference being you complete payment sooner and the interest rates a bit lower. The 15-year-old one, however, is entirely different in that the interest rates are way more economical. This is the main reason they are gaining popularity fast.
Adjustable-rate Mortgage
As the name suggests, the interest rate on this type of loan keeps fluctuating. The fluctuation is mainly dependent on the model you choose. In periods when the prices are low, ARMs don’t refinance letting homeowners benefit from this. However, the payments can be surprisingly high when the rates rise. ARM has the following loans under it
Variable-rate Mortgage
It is another ARM name only that exact one’s rates will keep adjusting over the loan term. The prices keep on changing as a reflection of the index rates of a third party and the margin of the lender. Capping the maximum interest, you will pay; the adjustments of the scales are scheduled every six months, twelve months or a longer-term.
Hybrid ARM
This type comes with an interest rate that is fixed for a specific period. Then, a floating interest rate follows. The most common ones are 3/1 and 5/1, where you have a three year fixed rate followed by a fluctuating period or a five year fixed interest period followed by a fluctuating one immediately after.
Optimum ARM
Here, you have four monthly payment options to get you started. You have an interest-only payment, a set minimum payment option, a 15-year-old, and a 30-year-old amortizing payment options. This type is usually used to get you a jumbo loan that you wouldn’t have qualified for.
Balloon Mortgage
This type of mortgage is usually short-termed, around ten years and mostly has meager payments. Sometimes you are only required to pay interest only. The only downside to it is at the end of the stated term. The whole balance is immediately due, making it very risky for many borrowers.
Interest-Only Mortgage
These types of mortgages give you options to pay a lower monthly installment for a specified period, but after which, you need to start paying the principal. A balloon one is typically a kind of interest only mortgage the only difference being here; the principal does have to be a lump sum. This type will allow you only to pay attention for a specific time.
After which you have to pay more principal than they would, had they opted for a traditional fixed-rate loan to make up for the lost time. It is more expensive in the long run but a good option for you if you are a first-time homeowner or starting a career or a business with little capital.
Reverse Mortgage
This type is not for everyone but seniors only. This type gives you access to a loan equal to your home’s value and can be withdrawn in a lump sum. You have set monthly payments which are not a must for you to pay, but your lender has a lien on your home for the amount you owe them if you happen to die. With this, you are okay until you have to vacate the house.
If you leave the house, even before your death, mortgage repayment will be taken out of the proceeds of the loan draining most of the equity many depend on for paying lengthy care expenses. It’s very reasonable in some cases but has all the knowledge before getting yourself into it.
Combined Mortgage
This type is very reasonable for you if you are trying to avoid Primary Mortgage insurance if you can’t put down 20% on a home. It usually comes in two waves where you can take a first loan worth 80% of the home’s value and another worth 20%, an 80/20 combination. The interest rates differ, usually, the first one being lower and at a fixed rate while the latter being high or at a variable rate. Interest wise, this can be more expensive, but a PMI is costly too. Depending on how you plan yourself, you can pay off the 20% one first which a high interest is enabling this loan to work in your favor.
In conclusion, it is imperative to consider the type of loan you choose. You have to place more priority and focus on fees and interest rates before making a decision.