It is easy for a first-time home buyer to get lost among the different types of mortgages available. Here is a discussion of the various types of mortgages.
Fixed Rate Mortgages
With a fixed rate mortgage, the interest rate is fixed for the life of the loan. Usually these mortgages are for a term of 30 years, but other terms such as 10, 15, or 20 years are available. The good thing about this type of mortgage is that you don’t have to worry about the interest rate rising later, increasing your monthly payment.
Adjustable Rate Mortgages
With an adjustable rate mortgage, also called ARM, the interest rate only stays fixed for a short initial period, and then the interest rate is allowed to fluctuate. The problem with adjustable rate mortgages is that the interest rate could rise substantially, making your monthly payments much higher in the future. On the other hand, ARM interest rates usually start out lower than the interest rates on fixed rate mortgages.
An ARM could be great for you if you need a lower interest rate now, but expect your income to rise in the future. If the interest rate will stay fixed for the first few years, and you only expect to stay in your home for a few years, this could also be the best deal for you.
This is a loan that is insured by the Federal Housing Administration. The lending standards are not quite as strict, because this type of loan is designed to encourage home ownership among people who otherwise would not qualify for mortgages. An FHA loan usually does not require as high a down payment as other mortgages. There is an upper limit to the amount that can be borrowed.
VA loans are mortgages that are insured by the government and are only available to military personnel, veterans, and surviving spouses. The down payment required is lower, or there may be no down payment required at all. As with an FHA loan, the size of a VA mortgage is limited.
Reverse mortgages are meant for seniors who need money but wish to stay in their homes. They can borrow money against the equity in their home. The loan and interest do not have to be paid back as long as the person stays in the home. This way, the person can stay in the home until they pass away, and the loan will be paid back from the proceeds of the sale of the home.
It is important to check that the reverse mortgage is federally insured. Some unscrupulous lenders use false advertising to prey on seniors with reverse mortgage products, causing them to lose their home.
In general, buyers searching for mortgages should keep in mind that the lenders are in it to make money. They don’t necessarily have your best interests at heart. Be sure to choose a mortgage that has payments you can afford. If it is an ARM, think about how you will handle a potential rise in interest rates. Even for fixed rate mortgages, don’t borrow more than you can afford.