If you are considering a mortgage loan as a first-time or move-up homebuyer or to refinance an existing mortgage or pull out equity, it helps to get a basic understanding of the various types of mortgage loans available. There are many factors and considerations in selecting the best home loan that complements and supports your overall financial goals. Our guide below will highlights a few of the most common types of loans and general recommendations for that loan type.
Thirty-Year Fixed Rate Mortgage
Traditional 30-year fixed-rate mortgage loans have a constant interest rate and monthly principle and interest payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.
Fifteen-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly principle and interest payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly principle and interest payment for the first five years and then turns into a traditional annual adjustable-rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
Adjustable Rate Mortgages (ARM)
When it comes to ARMs there’s a basic rule to remember…the longer you ask the lender to charge you a specific rate, the more expensive the loan.
2/1 Buy Down Mortgage
The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.
This loan has a rate that is recalculated once a year. Monthly principle and interest payments are adjusted annually at the updated interest rates.
With these mortgage loans, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time.
These are just a few highlights available from the various mortgage lenders through Priority Mortgage Corp. For the most thorough information available that matches your long-term financial goals, please contact our office at (614) 432-1141 to speak with to a mortgage professional.