Should you get a fixed-rate or adjustable-rate mortgage? A conventional loan or a government loan? Deciding which mortgage product is best for you will depend largely on your unique circumstances, and there is no one correct answer.
The traditional fixed rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and in most cases can be paid off at any time without penalty. This type of mortgage is structured, or "amortized" so that it will be completely paid off by the end of the loan term.
Even though you have a fixed rate mortgage, your monthly payment may vary if you have an "impound account". In addition to the monthly "principal + interest" and any mortgage insurance premium (amount charged to homebuyers who put less than 20% cash down when purchasing their home), some lenders collect additional money each month for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound account by the lender who uses it to pay the borrowers' property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.
Adjustable-rate mortgages (ARMs) are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is often lower than the rate that would be available to the same borrower, at the time, for a fixed rate mortgage. On the other hand, after the initial fixed period, the rate on an ARM can change to be higher than a fixed-rate mortgage would have been.
Adjustable-rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from one month to 10 years. After the initial fixed period, the rate typically gets adjusted periodically. A loan that is fixed for three years and then adjusts once a year, for example, is called a “3/1 ARM.”
At the adjustment date, the rate is set to the value of an “index” rate plus a “margin.” The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD), and the 11th District Cost of Funds (COFI). The loan terms identify the index that will be used and also specify the margin. Suppose that when the adjustment date comes, the index used for a given loan is at 3.25%, and the margin specified in the terms is 2.0%. Then the loan’s interest rate will be set at 5.25%.
Typically, the loan terms will limit how much an ARM’s interest rate can adjust. A loan agreement might specify a maximum interest rate for the loan; even if the index rises above that, the loan’s interest rate will not exceed the cap. A loan agreement might also limit how quickly a loan’s rate can change. Suppose your loan says the rate won’t change more than 1.5% at an adjustment. Even if the index leaps by 3%, your loan’s rate will go up by only 1.5% at that adjustment. If the index stays high, the loan rate will increase by up to another 1.5% at the next adjustment.
Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There may be a charge to convert; the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.
HARP 2.0 is a refinance option for homeowners that are "underwater," meaning they owe more on their home than their home is worth.
In order to be eligible for the HARP 2.0 refinance program, you must meet certain criteria. Firstly, you must not have refinanced through the original HARP program. You need to be current on monthly mortgage payments with no late payments over 30 days due in a minimum of six months, and have had no more than one late payment in the previous 12 months. Your mortgage must be from before May 31, 2009, and must be backed by Fannie Mae or Freddie Mac. Your loan to value (LTV%) must be at least 80%.
The purpose of HARP is to allow homeowners who owe a mortgage more than the value of their home to secure a more affordable and stable mortgage.
FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single family and multifamily homes. The FHA does not issue loans or set interest rates, it just guarantees against default.
FHA loans allow individuals who may not qualify for a conventional mortgage, especially first-time homebuyers, to obtain a loan. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.
A VA loan provides veterans with a federally guaranteed home loan that requires no down payment. This program was designed to provide housing and assistance for veterans and their families.
The Veterans Administration provides insurance to lenders in the case that you default on a loan. Because the mortgage is guaranteed, lenders will offer a lower interest rate and terms than a conventional home loan. VA home loans are available in all 50 states. A VA loan may also have reduced closing costs and no prepayment penalties.
Additionally, there are services that may be offered to veterans in danger of defaulting on their loans.
A balloon mortgage has an interest rate that is fixed for an initial amount of time. At the end of the term, the remaining principal balance is due. At this time, the borrower has a choice to either refinance or pay off the remaining balance.
There are no penalties to paying off a balloon mortgage loan before it is due. Borrowers may refinance at any time during the life of the loan.
Balloon loans typically have either 5- or 7-year terms. For example, a 7-year balloon mortgage with an interest rate of 7.5% would feature a 7.5% interest rate for the entire 7-year term. After 7 years, the remaining loan balance would become due.
Disclaimer: This material is not from HUD or FHA and has not been approved by HUD or a government agency.
A reverse mortgage is a type of home equity loan that allows you to convert some of the existing equity in your home into cash while you retain ownership of the property. Equity is the current cash value of a home minus the current loan balance.
A reverse mortgage works much like a traditional mortgage, except in reverse. Instead of the homeowner paying the lender each month, the lender pays the homeowner. As long as the homeowner continues to live in the home, no repayment of principal, interest, or servicing fees are required. The funds received from a reverse mortgage may be used for anything, including housing expenses, taxes, insurance, fuel or maintenance costs.
To qualify for a reverse mortgage, you must own your home. You may choose to receive the reverse mortgage funds in a lump sum, monthly advances, as a line-of-credit, or a combination of the three, depending on the reverse mortgage type and the lender. The amount of money you are eligible to borrow depends on your age, the amount of equity in your home, and the interest rate set by the lender.
Because the borrower retains ownership of the home with a reverse mortgage, the borrower also continues to be responsible for taxes, repairs and maintenance.
Depending on the plan selected, a reverse mortgage is due with interest either when the homeowner permanently moves, sells the home, dies, or the end of a pre-selected loan term is reached. If the homeowner dies, the lender does not take ownership of the home. Instead, the heirs must pay off the loan, typically by refinancing the loan into a forward mortgage (if the heirs meet eligibility requirements) or by using the proceeds generated by the sale of the home.
The many different types of home loans available can seem overwhelming. Should you choose a fixed-rate, adjustable-rate or government loan mortgage? The truth is there is no right answer. Choosing a loan type is an important decision that is best made after you have researched your options. Remember, taking the time to explore your options now can mean saving thousands of dollars in the long run.
Ask yourself the following questions to determine what loan type is right for you:
We can help you decide which loan best fits your needs. Follow the general guidelines outlined below to get started selecting the best mortgage for your home.