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.
Fixed-rate Mortgages
| 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
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
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.
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