What Type of Mortgage Loan Is Best For You?

What Is A Mortgage Loan?

Today there are many options available for home buyers who are looking at getting a home mortgage loan. To start, a home mortgage loan is secured by a piece of property or real estate, in exchange for funds that are received by the home buyer to purchase that home. The lender gets the promise from the buyer that they will pay back the funds within a certain time frame for a specific cost. If the borrower defaults on the terms of the mortgage note, the lender has the right to have legal claim against the borrower’s home.

Which Loan Is Right For Me?

There are many types of loans available for potential home buyers, so it is important to understand the difference between the various loans, as well as have a good understanding of your personal financial situation in order to determine which one is best. Mortgage loans can include: Fixed-rate mortgages, Adjustable or Variable-rate mortgages, FHA and VA loans, Balloon mortgage, Interest only loans, and Reverse mortgages.

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Fixed and Adjustable Rate Mortgage Loans

Fixed-rate mortgages usually consist of terms lasting 15, 20 or 30 years in length, and the interest rate stays the same over the entire life of the loan. The drawback to these types of loans is that if the interest rates drop in the future, the owner is left with paying a higher rate on the loan. In this case, home owners do have the option to look at refinancing if they want to lower their current rate of interest. Adjustable-rate, or ARM loans, usually offers a lower rate of interest than fixed-rate loans. The downside with ARMs is that rates can fluctuate over the life of the loan and when interest rates rise, the loan payments also increase.

FHA and VA Mortgage Loans

FHA loans, which are offered through the Federal Housing Administration, can be beneficial for home buyers with low qualifications to help obtain a loan with a lower down payment. These loans however are limited in the amount the homeowner can borrow. VA loans are offered by the government to military veterans and active duty members, as well as for the spouses of deceased military members. The rates are usually competitive and offer no down payment or a low down payment if required. As with the FHA loan, the size of a VA loan may be limited in the total that can be borrowed.

Balloon and Interest-Only Mortgage Loans

Balloon loans are usually set at a fixed rate with relatively low payments for a fixed period of time. Once an initial period has expired, the entire balance of the loan is due immediately which makes this type of loan somewhat risky for borrowers. With an Interest-only loan the borrower pays only the interest on the loan in monthly payments for a fixed term. After an initial period, the balance of the loan is due. This could mean much higher payments, and then paying a lump sum in the end.

Reverse Mortgage Loans

A reverse mortgage allows senior citizens the opportunity to convert the equity in their home to cash, and as long as they continue to live in the house, they do not have to pay back the loan and interest. The drawback is that reverse mortgage loans are subject to aggressive lending practices and misleading advertising by lenders that prey on seniors. With any of the loan types listed above, there can be advantages and disadvantages. Be sure to research and find reputable mortgage companies to work with during the process.