Types Of Mortgage Loans

Smart homebuyers should consider all types of mortgage loans before settling on financing terms. Buyers want to find the best package with the best interest rate, the lowest down payment, and more importantly, the most affordable monthly note. A mortgage is a short- or long term loan extended by a financial institution to an investor or home buyer, which is usually paid in monthly installments. There are two major kinds of loans: fixed rate or adjustable rate. A fixed rate mortgage is extended over 15, 20 or 30 years at one interest rate, which does not fluctuate. Payments remain the same over the life of the loan. Adjustable rate mortgages, also known as ARMs, include an interest rate which may be initially lower than a fixed rate, but varies according to a pre-determined index regulated by fluctuating returns on the U.S. Treasury Bill. ARMs allow borrowers to qualify for types of mortgage loans with interest rates which can increase after several years, usually mounting to a higher house payment or increased balloon payment at the end of the term. But high-interest balloon payments can prove fatal, causing foreclosures when buyers are unable to meet escalating rates. Buyers would be wise to heed Biblical admonishment: "He that handleth a matter wisely shall find good: and whoso trusteth in the Lord, happy is he" (Proverbs 16:20).

Both of these types of mortgage loans, fixed rate and adjustable rate, are offered through several different lenders. Homes are traditionally financed through conventional mortgage lenders offering two options, one based on the potential homeowner's qualifying income, and the other based on the property's value. Generally, the first income-based loan is extended to homeowners, and the latter applies to investors seeking portfolio loans based on potential rental income. The Veteran's Administration guarantees loans to military personnel sometimes at 100% financing. The amount of a VA loan depends upon the service person's rank and time served and is based on a sliding scale. Different from other types of mortgage loans, the Federal Housing Administration (FHA) offers financing to home buyers and investors to purchase or rehabilitate housing for owner-occupancy or rental. Homeowners may also opt for second mortgages on existing property, either to borrow money for home improvements or to pay off student loans, medical and dental bills, or as a flexible line of credit. The drawback to having a second mortgage is a high interest rate and shorter term, usually 15 years. Carrying a second can be risky if owners are unable to make additional monthly payments and interest due to extenuating circumstances.

Within these two broad types of mortgage loans, fixed and adjustable rate, lie a myriad of financing options tailored to suit buyers of all socioeconomic strata. Buying a home is not for the feeble minded nor the weak at heart; and negotiating the right terms is like maneuvering through a minefield. Most homebuyers rely on knowledgeable mortgage brokers, financial advisors, and real estate agents to guide them through the process of finding a suitable loan that fits their individual income and specific niche market. In the long run, it will pay to take time deciding on financing terms and interest rates buyers may have to live with for a lifetime. ARMs were designed to help first time buyers obtain financing for homes at lower interest rates with payments increasing, ideally, as the buyers' income earning potential increased over time. No one, not even sub-prime lenders who leapt at the opportunity to offer ARMs to buyers who could not qualify for prime loans, anticipated the economic woes which led to the current housing market crisis in the United States. For that reason alone, today's buyers should seek the counsel of reputable and reliable brokers, banks, and lawyers before plunging into types of mortgage loans which can backfire later.

A word of caution: Borrowers should beware of financing that sounds too good to be true. Adjustable rate mortgages offered through sub-prime lenders over the last decade caught homebuyers off guard when interest rates went through the roof. According to statistics, an alarming number of U.S. homeowners with ARMs are facing foreclosure; and the resulting housing market crisis has rocked the nation, causing a ripple effect in other industries, especially building trades and real estate. Types of mortgage loans with fluctuating payments may be too risky, especially for those buyers with limited earning potential. A fixed rate loan may include a higher interest rate, but there are no surprises. "Better is little with righteousness than great revenues without right" (Proverbs 16:8).

The key to avoiding types of mortgage loans that can wreak future havoc, such as adjustable rate mortgages, is to thoroughly investigate all options and terms. Wary buyers should compare the initial interest rate and ask how often the rate can change. Adjustable rate mortgages should also specify a cap, or a limit on how much the rate can go up or down during any adjustment period. Having a cap enables buyers to plan and budget on fluctuating payments. In comparing a fixed rate loan, buyers should take a realistic look at whether or not payments can be easily managed without becoming delinquent. People sometimes tend to buy more house than they have money. Wise money managers may advise buyers to purchase the size home that budgets can easily accommodate at a manageable interest rate, then either refinance when interest rates decrease or take out a home equity loan to make improvements to the property. Adding on a room to a three-bedroom, two-bath tract house may prove more economical than obtaining loans for larger properties that require heftier monthly payments. In the long run, deciding on a fixed or adjustable rate mortgage is a matter of personal preference and prudent consumerism.

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