There's More Than One Type of Home Loan
Different borrowers have different needs. For that reason, lenders offer an array of home loan products. What are you looking for? Knowing the benefits of each type may help you answer that all-important question.
Lenders generally offer three types of home loan products: Fixed Rate Mortgages, Adjustable Rate Mortgages (ARMs) and Balloon Mortgages. Which one will be right for you? Let's look at the advantages of each.
Fixed Rate Home Loans
A fixed-rate mortgage has both a fixed rate and a fixed monthly payment. Terms usually vary from 15 to 30 years. The shorter the term, the lower your interest rate may be. With a shorter term you can also count on building equity in your home at a much faster pace. If you plan to live in the home for a long time, a fixed rate home loan may be the route to take.
Advantages of a Fixed Rate Home Loan
The biggest advantage of a fixed rate home loan is that it is predictable. While your property taxes and insurance may increase, your loan payment will remain unaffected by interest rate changes. So as costs of living and inflation increase, mortgage payments become a smaller part of your overall expenses. In addition, if you suspect interest rates will be rising, it may be best to lock in to a fixed low rate.
With an ARM, monthly payments can increase or decrease on a regular schedule depending on changes in interest rates. These adjustment periods are usually 1, 3, 5 or 7 years. The interest rate changes are usually in relation to an Index. Since ARM loans offer a lower interest rate risk to lenders, they can generally be offered at a lower initial rate than a long-term fixed rate loan. This reduced rate can be an excellent choice of financing under certain conditions; such as high interest rates, rising income expectations, or short-term ownership.
Advantages of ARMs
ARM loans usually offer a lower interest rate than long term fixed rate loans. This can translate to a lower monthly house payment or can qualify you for a larger loan amount.
Balloon Mortgages are a bit of a hybrid of fixed and variable rate loans. They are amortized for 25 or 30 years, but have a fixed rate for a shorter period, usually 3, 5, 7 or 10 years. At the end of that 3, 5 7, or 10-year term, the borrower either pays the loan off or refinances the loan into a new balloon note or a fixed rate loan at the then current interest rate. Since this refinance is not automatic (as with an ARM), the borrower may have to pay for closing costs if you choose to refinance the balloon loan. Again, this is a popular choice for those who have plans for short-term ownership.
Advantages of a Balloon Mortgage
As with an ARM, Balloon mortgages can save you interest expense in the short run and qualify you for a bigger loan.
This is by no means a complete menu of loan options. Typically, there are a host of products within each of these major categories, with varying options to meet varying needs. Understanding these categories is an important first-step in determining which loan will ultimately work for you. You credit union mortgage staff will become a valuable asset as you make this decision, so be sure to use their knowledge and expertise to the fullest!