With the real estate market in a constant state of flux, timing is everything when making a decision on what type of mortgage is right for you. According to a recent Forbes article, Freddie Mac reported that mortgage rates are currently the lowest they’ve been since May 2013 as a fixed-rate, 30-year mortgage can be obtained at a rate of 3.69%.
There are several financing options available in 2016 when it comes to the number of mortgage loan types and programs available. The primary mortgage types include fixed-rate mortgages, FHA Loans, VA Loans, and hybrid loans. Within these categories are more specific sub-types that you want to be aware of when you shop for a mortgage. The type most common are fixed-rate and adjustable rate mortgage loans.
Fixed rate mortgage loans provide a fixed interest rate over a period of 10, 15, 20, typically 30, and even up to 40 or 50 years. The benefit of choosing this type of loan is that your monthly payment and interest rate will never change. The downside is the cost that comes along with this interest rate. When rates fall lower than your fixed rate, unless you refinance, you will be paying a higher interest rate.
Adjustable Rate Mortgage (ARM)
ARMs typically have a lower interest rate upfront. These types of loans have a rate that fluctuates over time based on a set interest rate adjustment schedule. This means that the monthly rate will change depending upon the market conditions.
The way the ARM works is identified by its title. For example, a 5/1 ARM is an adjustable rate mortgage that will have a fixed interest rate for the first five years and then every year after that, the rate will reset once per year. A 5/5 ARM means that the rate is set for the first five years and then will reset every five years. ARMs are less stable because, after the initial fixed-rate period, rates could be substantially increased and, therefore, the monthly payment will increase substantially as well. To help mitigate risks, ensure that, in the case of an increase, you will be able to manage the monthly payment when the variable rate occurs.
Rate caps and floors can help manage potential fluctuations during the adjustment period. These minimum and maximum limits can make ARMs a less risky alternative. Be aware that the frequency of adjustment should be carefully considered. Typically these have a lower starting rate when the frequency of adjustment is more often and a higher starting rate than the frequency is less often. Having a less often adjustment frequency rate can provide a bit more security but the payment that will be required at the maximum rate needs to still be within an affordable range.
Under the category of the ARM lay several subset ideas to consider such as the one-year treasury mortgage in which the first year has a fixed rate and then an adjustable rate every year thereafter. This is a good option because the rate is lower than it would be with a fixed-rate mortgage and when rates go down you still benefit, however, there is a loan margin added to the treasury average which the new rate is based upon and, with that margin, it is possible to end up paying even more than you would with a fixed-rate.
The Flexible Payment Option ARM, a monthly adjusted rate option, is a more risky ARM for the average buyer. It offers a choice of payment methods each month and contains a cap which limits the annual variance of a payment. This option may work well for those who work on commission or as freelancers but it comes with the possibility of a drastic increase and, according to Zillow, is not widely recommended by mortgage loan experts.
A Convertible ARM is one which can be converted, after a period of time, into a fixed-rate mortgage. This adjustable rate mortgage can be beneficial to those planning to refinance in the future as it is a loan that can be converted from adjustable to fixed after a certain period of time. If you are planning to refinance a fixed-rate mortgage anyway, this is a good option as it will save you refinance costs. The downside is that you will not be able to look around for a better rate as you could with a refinance and the rate on the refinance may have been lower than the newly converted fixed rate.
Other loan options to look into in this category include jumbo loans, balloon, and balloon conforming mortgages.
VA Home Loans
VA loans are available only to veterans and are guaranteed by the VA. These loans require nothing down, do not require mortgage insurance, and are assumable by home buyer.
Federal Housing Administration (FHA) Loans
An FHA loan is a loan that is subsidized by the government and includes the closing fees as well as a low down payment. This loan is guaranteed by the government and offers low rates for those who are not able to make the down payment or who have credit issues. This is an assumable loan which works well for first time buyers but may carry a higher rate than one might receive if they can afford to make a slightly higher down payment than the one offered with the loan.
With all of these options it pays (literally) to do your homework. Knowing the difference between each type of rate is key to understanding how each of them can benefit you. Learning the pros and cons of each mortgage loan type will allow you to have a clear frame of reference when determining which loan will work best for your house-hunting situation. Consider things such as how long you plan to live in the house, homeowner statistics for the area you are moving to, and follow your instincts when it comes to interest rate offers.
For referral to a mortgage broker in your area or for help in finding your dream home, contact Christina at 205-427-7722.
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