Types of Mortgage Loans
Fixed rate options keep the same interest rate for the entire duration of the loan, and will not fluctuate from month to month or year to year. Adjustable rate mortgages are just that – they adjust at predetermined intervals over time, but with a lower beginning interest rate than fixed loans. Fixed rate loans afford the borrower security and stability – though they will start higher than adjustable mortgages.
Fixed rate mortgages
These tend to be one of the most popular choices for any first-time buyer with lenders for first time buyers offering them to those planning to stay in a house for the long-term or duration of the home loan.
Adjustable rate mortgages
This option is best for a buyer who plans to stay only a few years in the property, in that for the first few years the loan has a lower interest than that of fixed rate mortgages. Adjustable rate loans do carry risk though – if the value of the house plummets and your mortgage interest rates increase dramatically you may not be able to refinance or sell the home.
Two-step mortgages
These have a fixed interest rate for an initial period of time, which changes at a predetermined date. The second rate will be adjusted to the market rates at the time of the shift, which can work to your advantage or detriment. When the rate shifts, the borrower has the ability to decide between a fixed or variable interest rate for the duration of the loan.
Balloon mortgages
Balloon mortgages have much shorter terms and begin with a fixed rate of regular payments and fixed interest rates for a predetermined period of time. After this it “balloons” and the rest of the remaining balance is payable with a one-time payment at the end of the loan term. Though this sort of loan entails lower interest rates in the initial years, it requires the borrower to gamble that they will have the funds to make the large payment at the end of the loan period, which often hinges on their financial situation remaining stable, or the property maintaining its value.
In addition, there are conventional loans – which are not guaranteed by the government – and options such as Federal Housing Administration (FHA), Veterans Affairs (VA), and Department of Housing and Urban Development loans (HUD), which may be an option for borrowers who qualify.
Reverse mortgages
If you’re an older homeowner, you may want to consider a reverse mortgage. Now, this isn’t what it sounds like - the bank isn’t paying you to live at your house. Rather, it’s a form of home equity loan that's geared toward older homeowners. The borrower remains the owner of the property and is not required to make monthly payments until they move out or pass away. Reverse mortgages have proven to be a reliable way for older homeowners to increase their monthly cash flow.
VA and FHA loans
Federal Housing Administration and Veterans Affairs loans are government supported loans that can help a first time home buyer secure a mortgage. VA loans are for military personnel and can get you a fixed rate mortgage with zero down payment. These loans also have relaxed qualifying standards, though they come with a VA funding fee that can range from between 0.4% - 3.3%.
With an FHA loan you’ll need to put down at least 3.5%, and will need to pay mortgage insurance premiums for at least 5 years. That said, these loans also come with lower qualifying standards, including credit scores as low as 580.
