Over the last few years, a wider array of loan programs has been offered by the mortgage industry. Along with more flexible qualification requirements, these programs allowed those who never thought they could be approved for a loan obtain their dream home. Of course, many of those recent homeowners are at risk losing their properties today, as they were unaware of how the loan terms of newer mortgage products would affect their ability to afford their monthly payments.

Knowing even the most basic loan types may assist you in finding a mortgage that best fits your income or financial management style. Although there are many subtypes of each of these loans, all of which have varying interest rates, repayment terms, and adjustable versus regular payment variability, there are basic programs you can consider before applying with a lender:

• Fixed-Rate: Typically the loan of choice for first-time homebuyers, your interest rate stays the same throughout the life of the loan. With that in mind, your payments will always be the same, as well as the portions of principle and interest within the payments. Though most people would select a 30-year term, repayment terms can also be as short as 15 years, or extended to 40 years. The longer term can assist a first-time homebuyer with limited financial capabilities afford a desired home that was thought to be outside of his or her price range.

• Adjustable-Rate (ARMs): In an ARM, you get an introductory interest rate that is lower than the fixed-rate, but it is then adjusted by the lender periodically, which can increase or decrease you typical monthly payment. The adjustment is based on both national interest rates and the margin added by the lender. Additionally, the adjusted rate is limited by a cap--the highest point to which your interest rate can be adjusted, and the rate cannot be adjusted more frequently than agreed upon before the loan term began.

• Hybrid: also known as a hybrid-ARM , it is a blend of both fixed- and adjustable-rate loans. Essentially, the first period (3-10 years) acts as fixed-rate mortgage, with a stable interest rate. After that period, the loan turns to adjustable rates with 1-year terms.

• Interest-only: In an interest-only loan, a borrower can make payment in the amount of the interest for anywhere from 5 to 10 years. After that period, the principle payments are amortized for the 20-25 years left in the loan term. This results in a greatly-increased monthly payment consisting of the principle payment that is much larger than in other loans due to amortization, and the interest charged on the principle.

Keep in mind you may be limited to certain loan programs based on your credit and how much you are willing to pay as a down payment. Even if you desire more stability in your monthly payments, the “Two Cs” may limit your ability to qualify for fixed-rate loans, or you may only be able to get the home you want (but don’t need) if you take a loan with greater variability.

References



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