Knowing full well that one size does not fit all when it comes to home mortgages, the lending industry has devised a number of different loan products that enable the majority of loan applications to qualify for a home loan.
The backbone of the lending industry is the fixed rate mortgage which specifies the terms of the loan at the onset and then does not change them for the duration of the mortgage. If you start off with a favorable interest rate today, you are protected from interest rate changes that might drive up the cost of loans in the next few years or decades. Conversely, if you end up with a high interest loan, you will be saddled with it until rates come down and you might qualify to refinance your loan.
Fixed rate mortgages are available in a number of lengths, but by far the most common ones are the 15, 20 and 30 year mortgages. The 30 year fixed rate mortgage is the preferred home loan for those interested in the highest interest tax deduction and who might not qualify for other loan products. A 20 year fixed interest rate loan is harder to find but it comes quite frequently with a lower interest rate. The 15 year fixed mortgage cuts in half the cost of the loan, but the monthly payments are significantly higher.
The Federal Housing Administration (FHA) offers fixed rate loans to qualifying applicants who are seeking to purchase a home that falls below a certain cutoff amount. These loans are considered for review and a down payment in the amount of three to five percent is usually all that is required. Similarly, the Rural Housing Service (RHS) offers comparable terms to residents of rural areas who only have a low income and would not qualify for other loans. Oftentimes there is no need for a down payment. VA loans are those offered by the Department of Veterans Affairs and in order to qualify the applicant must be a veteran of the armed forces who qualifies for the terms of the mortgage.
On the other end of the spectrum are adjustable rate mortgages, commonly referred to as ARM, which start you off with a very low interest rate
, but over time increase the interest you are paying. The time period during which the interest rate remains fixed is specified in your loan documents. The papers will also specify the frequency of the interest rate adjustments that will take place over the life of the loan. In the long term, these loans are going to cost you more money than the fixed rate mortgages and in many cases homeowners have found that they are unable to afford the increased monthly payments.
By way of an example, a typical 5/1 ARM would be a loan that has a low, fixed interest rate for five years but which will begin adjusting the interest rate in year six of the loan. Thereafter, adjustments are made annually.
A loan product not often chosen is the balloon loan. Much like the adjustable rate mortgages it has an initially low interest rate and overall monthly payment, but at the end of the predetermined time period there remainder of the loan is due and payable in full. This is a big chunk of money and many homeowners find that when the time comes to pay up they are unable to meet this obligation and either need to move or refinance.
