What Type Of Mortgage Loan Program To Choose
There are many types of mortgage loan programs for you to choose from. In some cases you must have excellent credit with excellent credit scores. In other cases, you can have less than perfect credit and still qualify to buy a home or refinance. Below you will find a brief summary of the three types of mortgage loan programs.
Fixed Interest Rate Mortgage
Offers stability with a constant fixed interest rate for the full term of the loan. Often has a slightly higher interest rate than an adjustable rate mortgage with all things being equal. However, with the uncertainty in the financial markets, a slightly higher interest rate and monthly payment is a small price to pay for the security of a fixed constant payment over time versus an adjustable rate mortgage. Terms for this mortgage can be from 10 years to 50 years and typically interests are lowest with the shortest term and higher as you go up in length of time.
Adjustable Rate Mortgage – ARM
The ARM offers slightly lower interest rates which means a slightly lower monthly payment than a comparable 30 year fixed rate mortgage. With a lower payment, home buyers can qualify for a bigger home for the same housing payment as would they get with a comparable 30 year fixed mortgage. The tradeoff with ARMs is that at some point if they are not refinanced they adjust to whatever interest rates are based on current financial market conditions. The risk with an ARM is that if markets are worse the ARM interest rate will go up causing the monthly payment to go up. If a homebuyer is not prepared for this payment increase it can lead to financial disaster such as a loss of a home due to foreclosure.
Balloon Payment Mortgage
This loan program is not that popular anymore. Essentially it is 30 year fixed rate mortgage that has a payoff due date of 5, 7 or 10 years instead of 30. So for example, if you got a 5 year balloon mortgage at 5.5% you would pay a mortgage payment equivalent to a 30 year mortgage fixed for 5 years and then on the first payment of the sixth year the balance of the mortgage would be due. This mortgage is designed to either be refinanced or paid off before the balloon payment is due. It is easy to see that if arrangements were put into place to pay this mortgage off by the balloon payment a homeowner could quickly get into trouble.
- Conversion Option – With some adjustable rate mortgages and balloon mortgages the lender will offer a conversion option. A conversion option allows the homeowner to convert their ARM or balloon mortgage into a fixed rate mortgage. If the lender offers this option be prepared to pay some money to take advantage of it.
Hopefully with this information you will be able to pick the type of mortgage that best suits your needs. Make sure you discuss these mortgage loan program options with your loan officer in more detail to help you make an educated decision that can financially impact the rest of your life.