Buying a home is a complex and tedious affair for most people, not only in finding the right home, but also on the right terms. It involves making a series of decisions before purchasing the ideal home.
One of those decisions has to do with mortgages, which are loans that are secured to purchase a real estate property or home. They provide financing options for prospective homebuyers, allowing them to come into legal agreements with banks or other lenders.
Mortgage loans are usually taken out by homebuyers who don’t have enough money to pay for the home in one lump sum. There is, however, several types of mortgage loans available on the market. Prospective buyers should analyze which one is best suited for their financial situation.
Choosing the wrong financing option could easily become an overwhelming debt situation for the buyer. Careful analysis of the available options, therefore, enables one to choose the most appropriate type of mortgage loan more wisely. Here is some more information on the types of mortgage loans to consider.
1. Fixed-Rate Mortgage
This type of mortgage is the most common one on the market. It involves the homeowner paying off the mortgage over a pre-determined period of time. It is usually spread over 10, 15, 20 or 30 years. The homeowner pays a fixed rate, in equal monthly installments, until the completion of the loan. This makes it a stable mortgage option. It is especially ideal when the interest rates (that are offered by banks or other lenders) are low.
Since it is spread over long-term periods, the monthly payments are significantly lower. However, for short-term payments, the monthly payments are relatively higher. Another important thing to note about this mortgage type is the interest rates. They tend to be higher for long-term payments and lower for short-term payments.
2. Adjustable Rate Mortgage
This is another common type of mortgage. It derives its name from the fact that the interest rates on the loan are adjustable. The banks or other lenders reserve the right to adjust interest rates, depending on the market fluctuations of prices. As a result, it has an unpredictability aspect, as the rates rise and fall time and again.
An adjustable rate mortgage usually features relatively lower interest rates. However, they sometimes rise to unsustainable levels when market prices rise. Also, homeowners tend to incur additional expenses, in the form of a penalty, if the loan is paid off earlier than the agreed-upon time.
3. Interest Only Mortgage
In this mortgage option, the buyer pays only the interest on the loan for the agreed pre-set number of years, and clears the whole amount at the expiration of the agreement. It is an ideal option for buyers with unpredictable incomes, and those expecting to come into a significant amount of money in the near future.
4. Hybrid Adjustable Rate Mortgage
Just as the name suggests, this mortgage option is a mix of the fixed-rate and adjustable rate mortgages. It involves two key periods; one in which fixed rates of interest apply, and the other period is the lender being able to adjust the interest rates according to the market fluctuations. This option is ideal for homebuyers who can handle inconsistent monthly payments in the adjustable period of the loan.
5. Balloon Mortgage
Balloon mortgages involve a few years of steady payments, followed by the completion of the outstanding balance in a lump sum. It’s ideal for homebuyers who are anticipating a significant growth in income over time.
6. Reverse Mortgage
This option is reserved for those over the age of 62 only. It involves an exchange of equity for regular payments from the bank or lender. Mortgages are a good financing option for buyers with insufficient amounts of cash for a one-time payment.
However, the several types of options available could be confusing for the buyers. It is important that, with the help of a professional, they analyze and reach an agreement on which mortgage option is well suited to their financial situation.
7. Federal Housing Administration Loan
This loan is provided by the Federal Housing Administration. The FHA protects the home buyer in cases of defaulting on payment. It involves an agreement that covers or insures the mortgage. It is advantageous to both the buyer and lender alike.
The buyer is able to get lower rates and smaller down payments, while the lender, on the other hand, is protected in case of defaulting payments. It is ideal for home buyers with low credit scores and first-time buyers.