What Types Of Mortgage Loans Are Available?
Types of Mortgage Rates Commonly Found
While the 2008 economic recession has triggered a lot of new regulation that has clamped down on questionable home lending, there is still a good array of loan types available to buy a house with. As a result, it helps to know the different categories commonly offered to understand the differences, benefits and drawbacks.
Fixed Home Loans
Fixed rate mortgages are the most traditional of home loans ever since the federal government became involved in pushing home-buying by backing banks and their lending. These loans come in 15, 20, and 30 year lengths and now even 40 years. However, regardless of the loan time length, the actual rate charged in interest stays the same, i.e. it is fixed. This provides predictability in payments over the duration of the loan and protects a homebuyer from changes in the lending markets that could drive interest rates up. That said, fixed loans tend to have higher rates than flexible loans.
Adjustable Rate Mortgages
No surprise, the adjustable rate mortgage, otherwise known as variable-rate mortgage or an ARM, is the opposite of the fixed loan. In the ARM loan, the rate fluctuates with the market, going up and down while the loan is outstanding. However, true ARMs aren’t quite so fluid. They usually come with a teaser period of the first five years, with an artificially low interest rate. Then the loan is allowed to float with the market based on a specific market index. In many cases the rate usually goes higher than the teaser period as well as higher than a fixed rate. So, while ARMs may be good for a short-period purchase such as an investment, they can financially bite if used for long-term financing.
Government Home Loans
Federal Housing Administration loans and Veteran Administration’s loans are designed to provide assistance by the government for specific homebuyers. Lower income as well as military veterans can both take advantage of lower interest rate loans through these programs if they qualify. For borrowers in either category the specialized loans can provide lending otherwise denied elsewhere. However, these government programs are limited in how much of a home loan they can provide. There are other government programs, such as home loans for farmers or rural buyers, but the VA and FHA loans are the largest programs available.
Interest-Only Loans
Common prior to the 2008 recession, interest-only loans are frowned upon but they work for those who don’t want to spend more than necessary on a property investment. Only the interest is paid, and it can be fixed or variable. These are generally high risk loans and no equity is gained during the early loan, but they have an attraction for investors.
In Summary
Home loans work differently for different buyers, but in every case, people are best served understanding the differences first before committing to one.
