Among the types of mortgages, there are the Fixed-rate mortgages, Adjustable-rate mortgages, Interest-only mortgages, and Government-backed loans. Choosing the right type of mortgage can make a big difference in your life.
Fixed-rate mortgages
Getting a fixed-rate mortgage means knowing your monthly payment will stay the same for the life of the loan. This can be a good thing, especially for people who plan to stay in their home for several years. Having a predictable payment means you can better budget and stay on top of your financial health.
Despite the convenience of a fixed-rate mortgage, there are some drawbacks. You may pay more interest or be forced to pay for a breakage cost if you want to pay your loan off early.
A fixed-rate mortgage is generally available in a variety of term lengths. The most common options are 15 and 30-year terms. Some lenders allow you to customize your loan by choosing a longer or shorter term.
Depending on how much you plan to pay each month, you might choose to go with a shorter term. For instance, you might want to sell your home sooner than a 30-year loan allows. However, a shorter loan may have lower interest rates.
An adjustable-rate mortgage, or ARM, has an introductory rate for the first few years. The rate changes after that, depending on the index to which it is tied. You may be able to save a lot of money in the long run by choosing an ARM.
ARMs are a good choice for borrowers who plan to move before the rate adjusts. However, they will cost more as interest rates rise.
With a fixed-rate mortgage, your payment amount will stay the same, no matter what the interest rate is. You also have more stability when it comes to property taxes and homeowners insurance. This means you won't spend too much money on your mortgage. However, you may have a hard time qualifying for a longer-term loan.
Fixed-rate mortgages are the most common type of home loan. They are easy to understand, and can offer the peace of mind you need when you're buying a home. It's important to understand all of the options, though, before you settle on a mortgage. You'll want to talk to your loan officer to discuss your options.
Adjustable-rate mortgages
Depending on the lender, an adjustable-rate mortgage may start with a lower interest rate than a fixed-rate mortgage. This makes it an ideal choice for borrowers who want to avoid the risk of rising interest rates. But borrowers should take care to make sure they understand all the terms of their loan before signing on the dotted line.
One of the biggest factors to consider when choosing an adjustable-rate mortgage is the index. This index is a market-determined rate that is used to determine the interest rate of the loan. It is based on the prime lending rate, which may be applied directly or in a rate plus margin basis. Depending on the lender's terms, an index can be set for a period of five years or 10 years.
Another important factor to consider is the margin. This margin can vary by more than 1% from lender to lender. The margin is used to calculate the fully-indexed interest rate.
The initial fixed-rate period on an ARM can be as short as one year, but many lenders allow loans to last for five or even ten years. This can be a good option for a homebuyer who plans to move before the rate resets.
The initial rate on an ARM may also change every six months. This can be a good option for buyers who have to move frequently. However, borrowers who have a long-term plan to stay in their home may not be a good fit for an ARM.
Rates on adjustable-rate mortgages fluctuate, which can make it difficult for borrowers to budget. However, the interest rate on an ARM can be lower than a fixed-rate mortgage, and borrowers may be able to make more money toward the principal loan balance by making low monthly payments. The rate can also go down if interest rates go down.
Despite the higher risk associated with an ARM, it is still possible for borrowers to afford the home they are considering. However, interest rates have gone up in recent years. If rates continue to go up, borrowers who aren't prepared may be unable to afford the increased payment.
Interest-only mortgages
Unlike fixed-rate mortgages, interest-only mortgages allow borrowers to pay interest for a certain period of time, usually several years. After the period is over, borrowers will have to pay principal and interest payments. This can be a good way for some buyers to avoid paying high monthly payments. However, it can be tricky to get out of an interest-only mortgage.
An interest-only mortgage is not a great choice for most home buyers. These mortgages are risky for lenders. The risk depends on the borrower's financial situation. During a recession, declining home values could leave homeowners underwater. Also, borrowers who are in an interest-only mortgage may find it difficult to refinance.
An interest-only mortgage is a good option for people who have a good track record of saving and are prepared to make large payments during the interest-only period. Similarly, it can be beneficial for people who plan to sell their home within a few years. It also helps people who want to avoid refinancing.
In a low-rate environment, interest-only mortgages are a safe bet. However, when interest rates rise, payments may be more expensive. Also, some interest-only mortgages have balloon payments that are extremely large.
It is important to consider all options before deciding. An interest-only mortgage may be appropriate for people who have a steady income. Others may be more interested in investing their savings. They might have funds tied to an IRA or 401(k) plan. These can help with the initial payments, but may not be enough to cover a full loan.
Depending on your loan, you may be able to use your home equity to help pay off the loan. For example, a couple nearing retirement might use their interest-only mortgage to purchase a vacation home. However, they may find it difficult to refinance because their home's value has fallen.
When considering an interest-only mortgage, shop around for offers from multiple lenders. You may also want to consult a real estate agent for advice. They may be able to connect you with lenders who offer interest-only mortgages.
You should also look for the best mortgage rates. You can use NerdWallet to get personalized mortgage rate quotes in minutes.
Government-backed loans
Generally speaking, government-backed mortgages are loans that are insured by a government agency. These mortgages often have lower interest rates and have more relaxed credit and down payment requirements. They also are less risky for lenders.
A government-backed mortgage can be a smart choice for many people. However, there are some requirements that make these loans more restrictive than other types of mortgages. It's important to know how these loans work and what types are available.
FHA loans are the most widely available government-backed loan. They require lower down payments and a credit score of 500. They also have flexible credit requirements and can be used to finance a primary residence or a secondary home. They also have no occupational restrictions.
USDA loans are another type of government-backed loan. They are available in certain areas, but they do require that you limit your income to a certain amount. These loans can also help you build equity. They are also more affordable than other mortgages.
VA loans are also a government-backed loan. They are available to active duty military members and veterans. The interest rate on these loans is lower than other types of government-backed mortgages, but there are some restrictions.
Conventional mortgages are loans that you can get from a conventional lender. They can be used to finance a primary residence, a second home, or even an investment property. Conventional mortgages require a higher credit score than government-backed loans. They also have a higher down payment, but they can be easier to qualify for.
The federal government-backed loan programs are meant to ensure that certain people have access to mortgage credit. These loans are available in many different types, but they are designed for particular borrowers.
The maximum conforming loan limit for a single-unit home will rise from $548,250 to $647,200 in 2023. This increase mirrors national data on the rising cost of housing. The conforming loan limit for a two-unit home will also rise, to $822,375 in 2023. The loan limit in high-cost areas will be even higher. The maximum loan limit will be over $1 million in some areas.