Mortgage rates are on the rise, but historically speaking they are still fairly low. As a result of the favorable mortgage market, lenders have produced several new creative financing options for purchasing or refinancing. Don’t let the confusion of mortgage options keep you from a new home or lower interest rate. Here is an introductory lesson to the four most common types of home loans.
Fixed-rate mortgages have a fixed interest rate over the lifetime of the loan, usually between 10 and 30 years (40-year fixed-rate mortgages are also slowly increasing in popularity). This means that the amount you pay each month is fixed, too. It’s a great mortgage choice if you want the reassurance of predictable loan expenses for the life of your mortgage.
This type of mortgage usually starts out with a lower interest rate (and therefore lower payments) than with a fixed-rate loan. However, your interest rate and monthly payments are dependent on market interest rates. The interest rate is usually adjusted annually, but depending on your loan package the adjustment period on your ARM may be as low as one month.
Increases in the interest rate are capped for each year, and for the lifetime of the loan. For example, an ARM interest rate might have an annual cap of 1.5% and a cap over the lifetime of the loan of 6%.
Adjustable-rate mortgages are a good option if you’re planning to own the property for only a few years, or if you expect your income to increase over the years so you can comfortably afford higher payments if interest rates should rise.
Balloon mortgages typically have a lower interest rate than fixed-rate mortgages (and hence may be easier to qualify for), however the loan is payable in full after five to seven years.
A balloon mortgage is a great option if you know you’ll be selling the property before the balloon payment is due, and you’re not comfortable with an adjustable-rate mortgage.
A jumbo mortgage is simply one which is larger than a typical mortgage. The 2006 limit for a traditional (or conforming) loan is $417,000, and any amount over this figure is considered a jumbo (or non-conforming) mortgage. This type of mortgage usually has a higher interest rate than a conforming loan.
Getting Mortgage Quotes
To get the best possible rates, aim to contact a dozen lenders or more. Keep all your inquiries to within a 14-day period to prevent your credit score (also known as a FICO score) from being negatively impacted by too many credit inquiries. Most inquiries that take place within a 14-day stretch of time are counted as one inquiry.
It’s wise to shop for a mortgage before you start house-hunting. Mortgage pre-approval is one of the best bargaining tools you can have when it comes to negotiating a sales price. Plus, it’ll save you valuable time at closing.HouseValues