Mortgage Information
Center
Understanding
Different Types of Loans
Today's
homebuyer has more financing options than have ever been available before.
From traditional mortgages to adjustable-rate and hybrid loans, there
are financing packages designed to meet the needs of virtually anyone.
While the different
choices may seem overwhelming at first, the overall goal is really
quite simple: you want to find a loan that fits both your current
financial situation and your future plans. Though this article discusses
some of the more common loan types, you should spend time talking
with different lenders before deciding on the right loan for your
situation.
General categories
of loans
Most loans fall
into three major categories: fixed-rate, adjustable-rate, and hybrid
loans that combine features of both.
 |
 |
 |
| Blairstown |
Hopatcong |
Parsippany |
Fixed-rate
mortgages
As the name implies, a fixed-rate mortgage carries the same
interest rate for the life of the loan. Traditionally, fixed-rate
mortgages have been the most popular choice among homeowners, because
the fixed monthly payment is easy to plan and budget for, and can
help protect against inflation. Fixed-rate mortgages are most common
in 30-year and 15-year terms, but recently more lenders have begun
offering 20-year and 40-year loans.
- Adjustable-rate
mortgages (ARM)
Adjustable-rate mortgages differ from fixed-rate mortgages in
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. In order to protect against dramatic increases in the
rate, ARM loans usually have caps that limit the rate from rising
above a certain amount between adjustments (i.e. no more than 2
percent a year), as well as a ceiling on how much the rate can go
up during the life of the loan (i.e. no more than 6 percent). With
these protections and low introductory rates, ARM loans have become
the most widely accepted alternative to fixed-rate mortgages.
- Hybrid loans
Hybrid loans combine features of both fixed-rate and adjustable-rate
mortgages. Typically, a hybrid loan may start with a fixed-rate
for a certain length of time, and then later convert to an adjustable-rate
mortgage. However, be sure to check with your lender and find out
how much the rate may increase after the conversion, as some hybrid
loans do not have interest rate caps for the first adjustment period.
Other hybrid loans
may start with a fixed interest rate for several years, and then later
change to another (usually higher) fixed interest rate for the remainder
of the loan term. Lenders frequently charge a lower introductory interest
rate for hybrid loans vs. a traditional fixed-rate mortgage, which
makes hybrid loans attractive to homeowners who desire the stability
of a fixed-rate, but only plan to stay in their properties for a short
time.
Balloon payments
A balloon payment
refers to a loan that has a large, final payment due at the end of
the loan. For example, there are currently fixed-rate loans which
allow homeowners to make payments based on a 30-year loan, even thought
the entire balance of the loan may be due (the balloon payment) after
7 years. As with some hybrid loans, balloon loans may be attractive
to homeowners who do not plan to stay in their house more than a short
period of time.
Time as a
factor in your loan choice
As has been discussed,
the length of time you plan to own a property may have a strong influence
on the type of loan you choose. For example, if you plan to stay in
a home for 10 years or longer, a traditional fixed-rate mortgage may
be your best bet. But if you plan on owning a home for a very short
period (5 years or less), then the low introductory rate of an adjustable-rate
mortgage may make the most financial sense. In general, ARMs have
the lowest introductory interest rates, followed by hybrid loans,
and then traditional fixed-rate mortgages.
FHA and VA
loans
U.S. government
loan programs such as those of the Federal Housing Authority (FHA)
and Department of Veterans Affairs (VA) are designed to promote home
ownership for people who might not otherwise be able to qualify for
a conventional loan. Both FHA and VA loans have lower qualifying ratios
than conventional loans, and often require smaller or no down payments
Bear in mind,
however, that FHA and VA loans are not issued by the government; rather,
the loans are made by private lenders but insured by the U.S. government
in case the borrower defaults. Remember too, that while any U.S. citizen
may apply for a FHA loan, VA loans are only available to veterans
or their spouses and certain government employees.
Conventional
loans
A conventional
loan is simply a loan offered by a traditional private lender. They
may be fixed-rate, adjustable, hybrid or other types. While conventional
loans may be harder to qualify for than government-backed loans, they
often require less paperwork and typically do not have a maximum allowable
amount.
For more information
Email or call Jeff at (973) 691-0022 or (973) 347-8713.
