Selecting the Right Loan
Choose the right type of mortgage for your individual financial needs. Review the kinds of mortgages that are available.
Fixed-Rate Mortgage (FRM)
The standard mortgage model. The interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you can get.
Adjustable-Rate Mortgage (ARM)
An adjustable rate mortgage offers a fixed initial interest rate and a fixed initial monthly payment. After the initial period is over, the rate of the mortgage is adjusted periodically to reflect the current market mortgage rates. Unless there are limits ("caps") you will have no way to predict how much your rate and payment might change.
The convertible mortgage allows the buyer to start out with an ARM, but have the option of converting to an FRM at specified points during the loan term. Questions to ask:
- Are there up-front fees?
- When can you convert?
- Are there additional fees when you convert?
- What is the lender's conversion rate?
Graduated Payment Mortgage (GPM)
A "graduated payment mortgage" is a mortgage where the payment starts low and rises over time. Since the initial payment is used to qualify the borrower, the GPM may allow a borrower to qualify who would not qualify with a standard fixed-rate mortgage (FRM).
Growing-Equity Mortgage (GEM)
This option is designed for borrowers who want to pay off their mortgage as soon as possible. Therefore the mortgage has a fixed interest rate and increasing monthly payments.
Like the GEM, the fifteen-year mortgage enables borrowers to repay their loan more quickly.
The biweekly mortgage is another option to repay loans sooner. Borrowers make two equal payments monthly.
Federal Housing Administration Insured Loans (FHA)
The Federal Housing Administration operates under the control of the Department of Housing and Urban Development (HUD). The FHA operates a program that allows buyers who might not otherwise qualify for a home loan to obtain one by removing the risk from the lender.
There are several FHA home loan programs available:
- Standard fixed rate (FHA 203b)
- FHA adjustable rate mortgage (FHA 251)
- FHA 2-1 buydown (FHA 203b, FHA 251)
- Energy Efficient Mortgages Program
FHA Down Payment Assistance
There are many non-profit and public charity organizations have been created to assist first time homebuyers, low to moderate-income families and general homebuyers with getting the closing cost and down payment for the purchase of a home.
This assistance is provided in the form of gift funds, which means that the money does not have to be repaid. Homebuyers who qualify can receive between 1% to 5% towards the purchase of the home. The homebuyer must use an approved mortgage lender, an approved real estate agent and qualify for an FHA home loan.
To learn more about down payment assistance look into 1) the Nehemiah Program, 2) the Ameridream program, 3) the HART program, 4) the CDS Homegrants program, or 5) the Partners in Charity program.
Veterans Administration Loans (VA)
VA loans are available only to veterans of the armed services, those currently in the service and their spouses. They have most of the advantages of FHA loans, and then some. VA loans are typically half a percent or more below market rates, and they can be obtained with no money down.
What is an interest only loan?
Interest-only loans come in many different forms. The rate can adjust annually or be fixed for a while (usually five, seven or 10 years) before becoming variable. The interest-only portion may end after the fixed period, or it may continue for a few more years before principal payments are required. There are typically limits caps that determine how much your interest rate can rise each year and during the life of the loan.