Monday, January 21, 2013

One Size Doesn't Fit All! Types of Mortgages

Unless you're planning to pay cash for a home, you will need to apply for a loan. Once your offer is approved and it's time to apply for the loan, it's a good idea to have a basic understanding of traditional mortgage options. There are all different types of loans so it is important that your mortgage broker works with you to select a loan that will keep your mortgage payment as affordable as possible.


Here is a list of some of the more common loans available to you.

Basic Types of Mortgage Loans

FHA Loans. FHA stands for "Federal Housing Administration," so yes - FHA Loans are backed by the government. They are also one of the most popular and common mortgage options for first time home buyers because there are minimal down payment requirements and your FICO score (your credit score) is less of an issue. They are also beneficial when buying a fixer-upper and for senior citizens.

Fixed-rate. In the "old days," this was one of your only mortgage loan options. In many cases, this is also the best and least risky mortgage option if you aren't a first-time home buyer. With these loans, your loan amount is based on current interest rates and those rates are locked in for the life of your loan. These are an ideal option in the current housing market since interest rates are still low. Should a homeowner wind up with a high interest rate, a good credit history will allow him/her to refinance the loan in the future when rates go back down. In the meantime, you can deduct the interest-portion of your mortgage payments on your annual income taxes.

Veteran's Administration (VA) Loan. If you're a military veteran, or a surviving spouse of a veteran, you probably qualify for a VA Loan. Similar to FHA loans, they are backed by the US Government, require minimal to no down payment and will provide low interest rates. They can also be used to adapt your home in anyway necessary to accommodate special needs, or to fix-up an old or run-down home.

Adjustable Rate Mortgages (ARM). Tread cautiously with these. They became very popular during the previous decade's real estate boom - especially amongst the arena of predatory lenders. The idea is that a low-interest payment now will create an enticingly affordable monthly mortgage. The problem is that when interest rates go up, so do your mortgage payments and the increase can be alarmingly steep. These mortgages created a large percentage of new home owners who now have a foreclosure on their credit report.

Interest-only Loans. Another "buyer beware" mortgage option is the interest-only loan. The initial payments are awesome because they are super-low and very attractive. However, at the end of a given period you will begin paying the "real" mortgage amount or will have to supply a balloon payment to pay-off the loan.

Hopefully this information will help you to make an educated choice about the loan-type which is best for you and your family. Happy house hunting!

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