When You Are in the Home Stretch, Choose the Right Mortgage Loan

There is no one-size-fits-all home loan program.  In fact there are more loan options available to homebuyers now than ever before.  The key to finding the right loan for your needs is to understand the options available and examine which type of loan best fits your specific short and long-term financial needs.

The first place to start the loan process is by looking inward at your present and anticipated future financial situation.  You need to know the answers to the following questions before you can find the optimum loan program suited to your needs.

·  How long will you remain in the home?

·  What is your current financial situation?

·  What are your longer-term income expectations?

·  How much interest rate fluctuation and risk are you willing to accept?

·  How much money do you have available for a down payment and other upfront costs?

Armed with a good understanding of your financial situation you can best evaluate these common loan programs:

Fixed-rate mortgage – A fixed-rate mortgage carries the same interest rate for the life of the loan which is most commonly 15 or 30 years.  Many lenders are now offering other terms including 20-year and 40-year fixed-rate loans.  Fixed-rate loans are the most popular choice because they provide a predictable monthly payment.

Adjustable-rate mortgage (ARM) – With a ARM the interest rate is tied to an index that rises and falls over time causing the loan’s interest rate and monthly payment to change over the life of the loan.  ARM loans typically have a cap to keep the rate from rising above a certain amount.  These loans are attractive for those who do not plan on staying long in their home because they often start with an interest rate two to three percent below a fixed rate mortgage.

Interest Only mortgage – For a set term the mortgage payment is applied only to the interest on the loan and not the principal.   The amount that would be applied to the principal can be used for investment purposes or some other purpose.  At the end of the term the loan reverts back to its original terms with the monthly payments raised to reflect the full amortization over the remaining years of the loan (for instance, following a five-year interest-only loan, a 30-year mortgage would now fully amortize over 25 years).

FHA/VA loans – The Federal Housing Authority provides mortgage insurance to private lenders in order to assist first-time homebuyers and others who might not be able to meet down payment requirements for conventional loans.  Down payments can be as low as three percent and closing costs can be rolled into the mortgage.  There is a statutory limit on FHA loan amounts.

The government also steps in to help veteran’s secure a home.  VA loans can offer up to 100 percent financing with no mortgage insurance.  Even those with less than perfect credit can secure good rates and closing costs can generally be rolled into the loan.

Subprime loans – Subprime loans are for those who have poor credit and do not qualify for a conventional loan or low down payment loan offered by the FHA or VA.  Subprime loans require a larger down payment and higher interest rate.  They are best as a short-term solution in which time you can clean up your credit in order to qualify for a better loan program.

Balloon mortgages – A balloon mortgage has a short term generally of around five to seven years, however the payment is based on a term of 30 years.  They are attractive in that they are easier to qualify for and often have a lower interest rate.  At the end of the loan term you will need to pay off the loan, refinance or convert the balloon mortgage to a traditional mortgage at current interest rates.

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