There are financing options designed to meet the needs of virtually anyone. The choices are many, but the goal is simple: A loan that fits your current financial situation and your future plans. Here we cover the more common loan types, but you should spend time talking with different lenders before deciding on the right loan for you.
- Fixed-rate mortgages
A fixed-rate mortgage carries the same interest rate for the life of the loan. Traditionally the most popular choice among homeowners, because the fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Most common in 30-year and 15-year terms, but also offered as 20-year and 40-year loans as well.
- Adjustable-rate mortgages (ARM)
Adjustable-rate mortgages carry an interest rate and monthly payment can change over the life of the loan due to the rate being tied to an index (such as Treasury Securities) that may rise or fall over time. To protect against dramatic rate increases, ARM loans usually have caps that limit rising above a certain amount between adjustments (i.e. no more than 2 percent a year), as well as a ceiling on how much the rate can rise during the life of the loan (i.e. no more than 6 percent).
- Hybrid loans
Hybrid loans combine features of both fixed-rate and adjustable-rate mortgages. Typically, a hybrid loan begins with a fixed-rate, then converts to an adjustable-rate mortgage. Be sure to confirm with your lender how much the rate may increase after conversion, as some hybrid loans do not have interest rate caps for the first adjustment period.
Other hybrid loans may start with a fixed interest rate, then change to a new fixed rate (usually higher) for the remainder of the term. Lenders frequently offer a lower introductory interest rate for hybrid loans vs. a traditional fixed-rate mortgage. Hybrid loans can be attractive to homeowners who desire fixed-rate stability, but only plan to own their property for a short time.
A balloon payment loans have a large, final payment due at the end of the term. For example, some fixed-rate loans allow payments based on a 30-year loan, but the balloon payment (loan balance) may be due after only 7 years. Like some hybrid loans, balloon loans may be attractive to homeowners who plan to own their homes for a short time.
Time as a factor in your loan choice
The length of time you plan to own your home can influence the type of loan you choose. If you plan to own for 10 years or more, a traditional fixed-rate mortgage may be your best bet. But if you plan to own for 5 years or less, the low introductory rate of an adjustable-rate mortgage may make the most financial sense. Typically, ARMs have the lowest introductory rates, followed by hybrid loans, and finally traditional fixed-rate mortgages.
FHA and VA loans
U.S. government loan programs through the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for those who might not otherwise qualify for a conventional loan. Both FHA and VA loans have lower qualifying ratios and often require little to no down payment.
FHA and VA loans are offered through private lenders, not government issued. FHA loans are insured to the actual lender and any U.S citizen may apply. VA loans are guaranteed if the borrower defaults, but are only available to veterans, their spouses and certain government employees.
A conventional loan is simply a loan offered by a traditional, private lender. They may be fixed-rate, adjustable, hybrid or other types. While conventional loans may be harder to qualify for than government-backed loans, they often require less paperwork and typically do not have a maximum allowable amount.