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Different Types of Mortgage Loan Options

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When it comes to picking the right loan type, none are better than another. It depends on your own goals. Read on to understand the many options available and which may be better for you.

Not all loans are created equal. Some are better if you plan on staying in the same home for many years, while others are better if you plan on relocating in the near future. If you're thinking of buying a new home or refinancing an existing one it's important you understand what options are available so you can make an informed decision.

Fixed Rate

A mortgage loan with a fixed rate of interest over the life of your loan. In other words, your monthly payment will not change during the life of your loan. Great for those who want to keep a home for a long time and have the peace of mind that mortgage payments will remain predictable. Fixed rate mortgages are available at 30, 20, 15 and 10 years, with the most popular being the 30 year option.

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  • Your monthly payments will not change; helping you plan and budget easier.
  • If interest rates go up, your rate will stay the same because they are not affected by the index market.
  • If rates go down your monthly payment stays the same. You can always try to refinance and take advantage of a lower rate, but be sure it's advantageous to do so due to the way mortgage loans are amortized.

Adjustable Rate

Also known as an ARM, adjustable rate mortgages have a fixed payment for a set period of time and then will adjust, normally to an index such as LIBOR or T-BILL. Every lender offers different initial fixed periods with the most popular being 5, 7, and 10 years before adjusting.

  • Your monthly payment usually starts off low.
  • If interest rates stay low you'll end of paying less over the long run.
  • Good for people who want to own for a short period of time.
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  • ARMs are typically considered riskier because the interest rate, and your monthly payment, may go up to unknown levels according to the index market.
  • It's important to think about how much your monthly payment may increase to and whether or not you'll still be able to afford it.

Interest Only Loan

You pay only the interest on the loan for a fixed term. Afterwards you could pay off the loan, refinance, or pay the principal and interest like a traditional fixed rate mortgage.

  • Monthly payments are lower than a fixed loan since you're not paying into principal.
  • Allows you to be flexible, especially if you're planning to own the home for a short period of time.
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  • You will not build equity on your home unless your home value appreciates.
  • Your loan amount will not decrease.
  • Your ability to pay a higher monthly payment after the interest only period expires is a risk.

FHA Loan

Insured by the Federal Housing Administration (FHA) and typically allows for a lower down payment and credit score. FHA loans can be fixed rate or adjustable rate depending on what your needs are. FHA loans are ideal for first-time home buyers.

  • Your down payment can be as low as 3.5% making it easier to get into a home.
  • Allows for a lower FICO score and has lessor income requirements making the loan easier to qualify for.
  • Sellers can contribute up to 6% of the loan amount towards closing costs.
  • There's a limit to how much you can borrow.
  • Requires an upfront Mortgage Insurance Premium
  • Requires an annual mortgage insurance premium.

VA Loan

Insured by the Department of Veterans Affairs and is reserved for members of the military, veterans or the current surviving spouse of one.

  • Your down payment will be reduced, or you won't have one at all.
  • There is no private mortgage insurance.
  • There is no pre-payment penalty.

Reverse Mortgage

These loans are available to individuals over 62 years of age. Instead of paying the lender, the lender pays you each month so long as you reside in the home. Interest rate can either be fixed or adjustable.

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