There is more than one type.
The 30-Year Fixed Rate "Old Reliable."
In a fixed rate loan, your payment stays the same for 30 years. That can be an advantage if you lock-in a good interest rate. That 30-year term can also be a disadvantage if interest rates go down, because you'll have to refinance to get a lower rate and possibly spend thousands on refinancing costs.
The 15 or 20-Year Fixed Loan "Fast Payoff."
Paying your monthly mortgage is a type of savings plan, which over time will accumulate into what lenders call "equity," the financial ownership interest in your home. A 15 or 20-year loan allows you to pay off your loan balance faster, decrease your debt and increase your equity sooner. Interest rates on these loans are slightly lower than 30-year loans. And your total interest payment over the life of the loan is much less, too, up to 50% less on a 15-year loan.
The disadvantages are: a) your monthly payment will be higher, so you must make more money to qualify for it; and b) you're locking away more money in home equity that could be invested elsewhere or spent on other needs.
But most of all, many homeowners don't realize they can reduce their interest payments on a 30-year mortgage by paying it off early. (Just make sure there's no penalty for prepayment). Why handcuff yourself to a rigid payment schedule when you can prepay your mortgage whenever you feel like it?
The Graduated Payment Mortgage (GPM) "Honeymoon Mortgage."
Homebuyers frequently overlook this type of loan but it's definitely worth considering. Monthly payments are lower during the early years, or honeymoon, because the lender is allowing you to pay off the loan principal later. You get to qualify for a larger loan, or use the savings for other needs. After five years, the payments increase by a fixed percentage to catch up. Be sure to check the interest rate. Remember also that your loan balance, or principal, will actually go up in the first 10 years or so. That could be a problem if home values decline in your area, and your home depreciates so much that it's worth less than you owe on your mortgage.
Government Insured Loans Let Uncle Sam help out.
The federal government has two major loan programs to support home ownership, Federal Housing Administration (FHA) loans for low- to moderate-income families, and the Department of Veterans Affairs (VA) program for veterans. If you're a veteran or on active military duty, check with the VA on your eligibility because a VA loan is just too good to pass up-in most cases, there is no down payment. FHA loans have lower down payments, and both VA and FHA have easier qualifying requirements. The downsides are you'll pay slightly higher mortgage insurance premiums for FHA, and you'll pay a Funding Fee to VA as high as 3 percent of the loan amount.
Next Type: The Adjustable-Rate Loan
Be prepared for change.
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