Wednesday, May 25, 2011

What Are The Different Types Of Mortgage Loans

Logo of the Federal Housing Administration.Image via WikipediaIf your about to make a home purchase, the biggest factor in the process is finding financing. There are a large number of possible choices in the financial market today. You need to know as a consumer what they are and how they work. So you can find the best possible loan for your circumstances.

Basic Home Mortgage.

The most popular home financing option is the fixed rate mortgage. Nearly 70 percent of people chose this type of loan. Why people like this type of loan is that it is stable. Every month you make the same payment. It never changes. Also the interest rate will never change, it will always remain the same.

Adjustable Rate Mortgages.

Adjustable rate mortgages are a popular choice among home buyers. Their interest rate is tied to an index that change according to prevailing market rates. The intervals are specified in the mortgage documents and the interval of adjustment can be anywhere from one year to seven years. When the adjustment time arrives, according to the prevailing market rate, your payment will rise or fall. This doesn't happen once, it happens again when the interval comes around again.

Government Guaranteed Mortgage Loans.

The FHA loan is a fixed rate mortgage that is designed for the first time home buyer of moderate or low income. Guaranteed by the Federal Housing Administration, these loans can be easier to qualify for than a traditional FRM and allow a smaller down payment than most other home loans, generally about 3 percent. Interest rate are usually lower than standard fixed rate loans, and programs are available for the purchase of single family homes or multi family ones, as long as they are to be owner occupied.

Veterans Administration Loans(VA).

VA loans are another government guaranteed mortgage. To be eligible for a VA loan, one must have a history of active military service or be the surviving spouse of an active service member. Often, a veteran can obtain a VA loan with little or no down payment, but must demonstrate the ability to make monthly payments.

USDA Rural Development Guaranteed Housing Loan.

The USDA Rural Development Guaranteed Housing Loan is another government guaranteed home loan option. This type of home mortgage loan is provided to low and moderate income individuals who are purchasing a home in an area designated as a Rural Development eligible area. No down payment or mortgage insurance is required with this loan program, and qualification can be much easier than your average home loan, allowing consumers with less than perfect credit to obtain financing for home purchases.

Option ARMs

Also referred to as flexible payment ARMs, Option adjustable rate loans have an interest rate that adjusts every month with no adjustment caps. These loans allow borrowers to make very low mortgage payments initially, but these monthly payments will rise over time, often quite steeply.

Balloon Mortgages

Balloon mortgages are structured with a payment schedule similar to that of a thirty year fixed rate loan, although the term of the balloon loan is shorter, most often spanning five to seven years. At the end of the loan term, the outstanding balance must be paid in one lump sum, either out of pocket or by refinancing the home.

Interest Only Mortgages

Interest only mortgages are loans that allow the borrower to pay only the interest on the loan for a predetermined period of time. The principle of the loan is not paid down during this period at all, leaving the homeowner a lower monthly payment to meet over the short term. However, once this initial interest only period expires the payments increase to include repayment of the principle and are steeper than a standard loan, as the principle must be paid over a shorter time period. The longer the interest only period, the higher the payments will rise after its expiration.

Biweekly Mortgages

Biweekly mortgages are loans in which the borrower makes payments every two weeks instead of the typical monthly payment arrangement. The result of this practice is a slightly shorter repayment term. Paying biweekly results in 26 payments a year, which is equivalent to thirteen monthly payments, rather than the twelve payments made with a standard monthly mortgage payment.

Bimonthly Mortgages

Bimonthly mortgage plans do not require any extra payments, but save slightly on interest by advancing the payment by half the month. On average, these types of arrangements only shorten the loan term by approximately one month on a thirty year mortgage.

While each option may prove itself best for a segment of loan seeking consumers, none will be a perfect fit for everyone. Depending upon personal finances, the length of time one intends to reside in the home to be purchased, and many other factors, the perfect home loan option will vary widely from one consumer to another.

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