After the housing boom fell out in the early 2000s, mortgage lenders returned to being a bit more sensible with who they choose to fund and with what type of loan. This means the prospective home buyer has less creative mortgages to choose from, but the upside is that your financial future is protected with a home loan you can actually afford. Here is a basic primer on the most popular loans available.
A fixed-rate mortgage means that you will pay the same interest rate for the life of the loan. No matter what happens with the economy, your monthly payment will remain constant. This can be very convenient for families who live on a fixed budget and need to have consistency when it comes to their bills. A fixed-rate mortgage is simple and easy to understand, making it a good choice for first-time home buyers.
One of the disadvantages of a fixed-rate mortgage is that if the interest rates fall, your payment won't be lowered because you are locked in at whatever the interest rate was at the time the loan originated. If you locked in at a low interest rate, this is an advantage for you, but if you locked in at a higher interest rate and it falls, your only option is to refinance, which is costly and time consuming. It requires paying loan closing costs again, which can run thousands of dollars, and time spent gathering financial documents and visiting the title company.
ARM (Adjustable-Rate Mortgages)
An adjustable rate mortgage is more complicated, but like a fixed-rate mortgage, it has both advantages and disadvantages. One advantage is that an ARM typically starts out with a lower interest rate and monthly payment. This can be ideal for someone who doesn't plan on staying in their home forever. It's also a good option if you know you will be able to pay the loan off quickly. An ARM offers less financial security, however, as the monthly payments rise and fall as the interest rates do, which means you have less control.
Interest-Only Jumbo Loan
This is a loan than is best suited for wealthier buyers with sporadic income, for homes that cost several hundred thousand dollars. The advantage is the home buyer is only responsible for paying the interest for the first five years of the loan rather than the interest and principal. This is a good loan option for people in the entertainment and sports industries, who may receive their salary in lump sums.
For more information on home mortgage loans, contact someone like Dave Schell at Guaranteed Rate Mortgage.