| Loans: Introduction to Loans... |
by Jonathan Lammers
With so many financing choices available today, it's easier than ever to find a home loan that meets both your budget and future plans. But before you sign on the dotted line, it pays to be familiar with some of the most common types of loans. You should also get advice from your real estate agent and speak with several lenders about your options.
| Summary Points |
|1. || Learn more about your financing options by getting advice from your agent and speaking with several lenders. |
|2. || Use your budget and how long you plan to stay in the home as helpful guides. |
|3. || Consider a government loan program if you need help qualifying for a loan. |
Fixed-rate mortgages carry the same interest rate for the life of the loan. These types of loans have traditionally been the most popular choice for homeowners because their steady payments are easy to budget for, and can help protect against inflation. Fixed-rate mortgages are most common in 30-year and 15-year terms, but may also be available for 20-year and 40-year mortgages.
Adjustable-rate mortgages (or ARMs) are the most widely accepted alternative to fixed-rate mortgages. The primary difference is that the interest rate and monthly payment can change over the life of the loan. This is because the interest rate for an ARM is tied to an index (such as Treasury Securities) that may rise or fall over time. To protect homebuyers from dramatic rate increases, most ARM loans have "caps" that limit the rate from rising above a certain amount between adjustments (e.g. no more than 2 percent a year), as well as a "ceiling" on increases over the life of the loan (e.g. no more than 6 percent).
Hybrid loans get their name because they combine features of both fixed-rate and adjustable-rate mortgages. For example, a typical hybrid loan may start with a fixed-rate loan for several years, and later convert to an adjustable-rate mortgage. (Some hybrid loans do not have interest rate caps for the first adjustment period, so be sure to check with the lender). Another type of hybrid loan may start with a low introductory fixed interest rate, and then change to another (usually higher) fixed interest rate for the remainder of the loan term.
Using Time Wisely
The length of time you plan to live in a house should be an important factor in your choice of financing. If you plan to stay for 10 years or longer, a traditional fixed-rate mortgage may be your best bet. But if you plan on owning a home for less than 5 years, then the low introductory rate of an adjustable-rate mortgage or hybrid loan might make the most financial sense. In general, ARMs have the lowest introductory interest rates, followed by hybrid loans, and then traditional fixed-rate mortgages.
| Loan Comparison || Pros || Cons || Time Factor |
| Fixed-Rate Loans || Steady payments, easy budgeting. May protect against inflation || Can be costly to refinance if interest rates drop. || Attractive if you plan to stay in the house for many years |
| Adjustable-Rate Loans || May be easier to qualify for. Payments can drop with interest rates || Payments vary over time and may rise substantially with interest rates. || Consider if you plan to stay in the house for only a few years. |
| Hybrid Loans || Often have low introductory rates; flexibility || May not have adjustment cap. Payments can rise over time. || Can work well if you only plan to stay in house for a short time. |
F.H.A. and V.A. Loans
If you find it difficult to qualify for a conventional loan, U.S. government loan programs from the Federal Housing Authority (F.H.A.) or the Department of Veterans Affairs (V.A.) may be helpful. Designed to promote home ownership by offering lower qualifying ratios and reduced down payments, F.H.A. and V.A. loans are not issued by the government, but instead are made by private lenders who are protected by government insurance in case the borrower defaults. Unlike conventional loans, both F.H.A. and V.A. loans have maximum allowable amounts and may require additional paperwork and inspections before the loan can be approved.