Types of mortgage loans and their benefits
Thirty-Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for adjustable-rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run because you can lock in the rate for the life of your loan.
Twenty-Year Fixed Rate Mortgage
The 20-year loan option provides distinct advantages over other products. You get the advantage of the fixed rate and payment for 20 years, the rate is slightly lower than that of the 30 year mortgage and you will own your home 10 years sooner. This is a good option when you do not want to finance for 30 years, but cannot quite afford the option of the 15-year mortgage payment.
Fifteen-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great.
Ten-Year Fixed Rate Mortgage
The 10-year fixed rate mortgage is a great option for owning your home in no time and taking advantage of a low interest rate. This is usually a good option when refinancing to avoid extending your loan terms and still pay off your home in a short time period. Your rate is fixed for the full 10 years and you will pay significantly less interest over the life of the loan.
Adjustable-Rate Mortgages (ARM)
An Adjustable Rate Mortgage is a loan that has an interest rate that changes annually, usually in relation to an index, and payments may go up or down. Hybrid ARMs--such as 5/1, 7/1 or 5/5--can offer the best of: lower interest rates (like ARMs) and a fixed payment for a longer period of time. The first number indicates the initial fixed-rate period, and the second number indicates how often the rate can adjust after that. For example, a “5/1 loan” has a fixed monthly payment and interest rate for the first five years and then adjusts annually based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
The Construction to Permanent loan is designed to finance the construction of your dream home. You have the option of a 10, 15, 20 or 30-year amortization with a fixed rate. The rate is locked in up front at time of application. During construction you make interest-only payments at a discounted interest rate. Once construction is completed, your loan terms are finalized and you begin making principal and interest payments.
A FHA (Federal Housing Administration) mortgage is a government-backed mortgage product, offering 15, 20 and 30-year financing options. This is a great option for first-time home buyers with limited funds for down payment. Not only can the seller assist with closing costs, but the source of funds for down payment can be 100% gift funds from a relative. The other benefit is the credit score requirements are lower than the conventional mortgage products. The disadvantage of FHA financing is the costly PMI which remains for the life of the loan.