Before you take one step into an open house and begin your search for homes for sale, it’s important to get pre-qualified for a loan. Okay, that sounds easy enough until you start looking at all the loan programs out there. What are ARMs, balloons, and jumbos? All these terms can be so confusing and it’s difficult for anyone to sort through the variety of choices out there. There is everything from 30- and 40-year fixed rate loans to 1-year adjustable rate loans, so how do you know what’s right for you? We’ve tried to take some of the mystery out of the process to help you make a more informed decision on your purchase of real estate. At any time feel free to check our mortgage calculator and see what your options are.
1. 30-year Fixed Rate Mortgage:
These are the safest because not only is the monthly mortgage payment relatively affordable (since payment is extended for 30, even 40! years), but you also know what the payment will be for the entire length of loan. 30-year fixed rate loans give you, the homeowner, peace of mind, because you know what your payment will be, though property taxes and homeowner insurance may fluctuate. These are best if you’re planning to stay in your home for a long period of time. The only con is that when rates go down, you’ll need to refinance to take advantage of the lower rates.
2. 15-Year Fixed:
Definitely best if you can afford a larger monthly payment. This is also a great choice if you buy a less expensive home than you qualify for. You’ll be able to pay off your loan in half the time and save huge bucks on interest. In addition, the interest rate is lower on a 15-year fixed than the typical 30 year fixed. With the low cost of homes, this may be an even more appealing option.
3. Jumbo Loan:
If you are purchasing a home in a high cost area or purchasing a larger, more expensive home then you may have to get a jumbo loan. These are necessary when the loan amount exceeds the conforming loan limits. The downside to these loans is your interest rates will be higher than on a conforming loan.
4. Interest-Only Loans:
On interest-only loans, you just pay the interest for a pre-determined period of time, while the principle balance remains untouched. This enables you to qualify for a more expensive home since the monthly payments are lower.
5. Adjustable Rate Mortgage (ARM) Loans:
There are a wide range of different options if you decide on ARM loans. The interest rate adjusts according to a certain mortgage index, which represents the rate lenders pay to borrow money as economic conditions change. Each adjusts after some set period, possibly monthly or yearly. Some have a long lag time at the beginning of your loan period and then adjust every year after that. For example, a 5/1 arm remains fixed for the first five years and then begins adjusting annually. There are two major limiting factors for ARMs' interest rates: one is a cap on the amount a loan can adjust for a single period; the other caps the loan’s lifetime adjustment. One advantage for you, as the buyer, is you usually can qualify for a more expensive home, since qualifying is done at the lower starting rate. Also, if interest rates go down you are able to take advantage of the lower rates without refinancing. However, a good measure of risk is involved, because if the rate adjusts upward, your monthly payment can raise significantly.
6. Assumable Loans:
The assumable loans allow the loan to be transferred from the seller to buyer alleviating your need (as the buyer) for a new mortgage. Assumable loans are not used as much now, as in the past due to the currently low interest rates. Assumable loans can be very attractive to you if rates begin to drastically increase.
7. Balloon Loans:
If you choose a balloon loan, you’ll generally have a lower interest rate over a period of time and then have a set time when your loan balance comes due. Balloon loans are frequently combined with other types of loan programs.
There are many so loan products out there it’s easy to start feeling overwhelmed. You, as the homebuyer, need to carefully consider your options. Don’t forget that how long you intend to stay in your home will be a huge determining factor.
Regardless of which loan type you choose, the good news is that interest rates are still incredibly low, so talk to your lender today and start looking for your dream home!Kevin Hughes