Mortgage Loan Options

Mortgage Loan Options

Many people looking for a new home make the mistake of not researching and understanding the right type of loan. You will want to make sure that you learn about the different options available to you so that you can make the best decision for your situation. Choosing the proper loan in the beginning will save you much frustration and time.

In a competitive market, you will want to be ahead of the game, so you need to make sure to talk to a lender early on. A good lender will provide you with different scenarios regarding payment information and interest rate for the types of loans you are interested in. They will also pre-qualify and/or pre-approve you for a loan so that you know exactly how much you can afford when you start home shopping. This is an important step; sometimes there is a difference between what you think you can afford and what the bank is willing to lend. Knowing where you stand will help you make informed offers that are appealing to sellers and help you get into your new home faster.

In order to help you understand some of the most common mortgage scenarios, we have compiled this list for you. However, please be sure to find a lender who is willing to understand your needs, answer questions, and advise you on what the best scenario will be for your situation.

Fixed-Rate Mortgage (FRM)

The Fixed-Rate Mortgage is the standard in the industry, and the most common, being the oldest and most easily understood of all mortgage options. Because the interest rate and payments remain fixed over the life of the loan, this type of mortgage is ideal when the interest rates are low and the borrowers plan to live in their home for a long period of time.

Adjustable-Rate Mortgage (ARM)

An Adjustable-Rate Mortgage gives you an adjustable interest rate that will periodically rise and fall based on market indexes. Therefore, you assume the risk of a rising interest rate, but when the rates fall, you reap the benefits. This type of mortgage is an option for borrowers who don’t plan to be in the home for a long period of time.

When you choose an ARM, the index and the margin will determine the interest rate you pay. The index is the rate set by market forces and set in large part by the federal reserve. The margin is a number of percentage points added to the index. The margin is typically determined by the type of loan, your credit history, and other factors. Your interest rate will be the index plus the margin.

It is important to ask whether the ARM you are looking at has “caps” (set limits that determine how much your rate can rise per determined time period); if it doesn’t, you will not be able to predict how much your monthly payment might change due to market influences. An ARM without caps can be a very risky loan.

Convertible Option

This type of mortgage option gives the buyer the ability to start out with an ARM and convert to a Fixed-Rate Mortgage at specified points during the loan term. Some important questions to consider are when the lender will allow you to convert, whether the lender will charge you up-front fees, whether will you have to pay more for the ARM with a conversion option than an ARM without one, and whether there will be additional fees due when you convert.

Graduated Payment Mortgage (GPM)

A Graduated Payment Mortgage allow the borrower to begin the loan with smaller payments and then raise them, usually over a five to ten year period. At that point, the payments will remain fixed for the remainder of the loan. This is an ideal situation for a borrower who can reasonably expect steady salary increases during the initial period of the loan.

Growing-Equity Mortgage (GEM)

A Growing-Equity Mortgage allows borrowers to pay off their homes more quickly than a conventional loan but without the fixed payments of a shorter loan. The interest rate will remain fixed, but the monthly payment will increase according to a pre-arranged schedule. This allows extra money to be applied to the principal, thereby reducing the balance more quickly.

Federal Housing and Veterans Administration Loans (FHA/VA)

The Federal Housing Administration (FHA) and the Veterans Administration (VA) offer a wide range of mortgage choices. FHA loans are available to all qualified home buyers, but VA loans are restricted to those who have served in the military. Both loans include fixed and adjustable rate mortgages. An attractive aspect of these loans is that they feature low or no down payment terms and are often assumable by future purchasers.

Reverse Annuity Mortgage (RAM)

The Reverse Annuity Mortgage (RAM) is a new type of mortgage designed for retirees and older borrowers who have either paid for or almost paid for their homes. The RAM allows the borrower to use the equity in the home as a liquid asset in order to supplement their income.

The home will be appraised by the lender, who will base the loan on a percentage of its current value. The homeowner retains ownership of the home, but the property acts as security for the lender. The lender then pays an annuity to the borrower, usually on a monthly basis, up to an amount equal to the equity they have in the home. The borrower should be advised that the lender may consider only the current market value of the home rather than any future appreciation when deciding on the monthly payments.

This loan is especially appealing because owners receive what amounts to monthly tax-free income. Usually, this income is available for life or until the house is sold. However, borrowers should still be aware of the risks: if the homeowner needs to sell and move, there may not be enough equity in the home, and/or the lender.

Conclusion

As you can see, there are many options available, and each borrower will have a unique set of circumstances that will influence the decision. Talking to your real estate agent and your lender is very important and will help you choose what is best for you. Please contact us for further information so that we can help you get into the home of your dreams!

*Please bear in mind that the information supplied in our articles is not engaged in rendering legal, financial, or any other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.