Which Type of Home Loan is Right for You?

Things to Consider With Any Home Loan

Interest Rate Structure

Fixed Rate - As the name suggests, a fixed rate mortgage is one where the interest rate stays the same for the life of the loan. With interest rates at record lows today, it's hard to justify not opting for a fixed rate loan. A fixed rate loan will lock in the low interest rate and ensure that your monthly mortgage payment doesn't fluctuate which will help make your financial planning easier now and in the future.

Adjustable Rate - Adjustable rate mortgages, also known as ARMs, have interest rates that change based on certain market interest rates. These loans can be a bit more risky, especially now, because there's no way of telling if and when interest rates will go up and there's very little chance of interest rates going down.

Hybrid ARM - Hybrid ARMs are a newer option which blends aspects of both fixed rate and adjustable rate mortgages. Much like new credit cards, for the first part of the hybrid loan you'll have a low introductory rate that will then be adjusted every year after a specified period of time. With these loans the rate adjustment is delayed which makes them popular with buyers that know they won't be in the home longer than the intro period (typically 3-10 years).

One of the latest reports from the Mortgage Bankers Associates shows that rise of hybrids has helped ARMs rebound to become 6.1% of all mortgages written in April 2011, up from 1.5% in April 2009.

Length of Term

The duration of time that it takes you to pay off your loan is a lot more flexible than you might imagine. A 30 year loan is very common but by no means the only option available to buyers. In fact, a 30 year loan may not make the most financial sense explains Sandy Wagner, Senior Loan Officer at GFI Mortgage Bankers: "I find most people automatically want to go with a 30 year fixed because they feel it is the safest option. But that can cost them a lot of extra money if they think they will be moving again in the next 5 or 7 years." 

Typical term limits are:

• • • 15 year
    • 20 year
    • 25 year
    • 30 year

Things to keep in mind when you consider the length of the term include:

• • How long you'll likely own the home?
  • What the associated costs are - fees, points, etc.?
  • How different durations affect the total monthly payments?
  • Is there a prepayment penalty for paying the loan off early?

Down Payments

When it comes to down payment decisions there are a lot of things to factor in. The down payment you plan to make can affect the types of loans that are available to you, the amount of your monthly mortgage payment and the fees you'll have to pay. Although there are far less lenders willing to make a loan with zero down they do still exist, but you'll need to consider whether the lower up-front cost is worth it in the end.

Types of Home Loans

Government Loan Programs

FHA Loan

FHA mortgages are loans insured by the Federal Housing Administration through mortgage insurance. Though there are limitations on how much can be borrowed and borrowers have to pay upfront and monthly mortgage insurance premiums, there are many advantages to choosing an FHA loan now and in the future.

Jim Campanella, Sales Manager/Loan Officer at Supreme Lending explains that FHA loans have a lot of advantages including "a small down payment requirement (3.5% of the purchase price) plus the fact that the loan, under certain circumstances, is assumable". The latter point is "a marketing advantage to a homeowner with an FHA loan."

VA Loan

VA loans are government loans that are only available to veterans and sometimes the spouses of deceased veterans. This is one of the few home loans that has no down payment requirement. However, there are other requirements that must be met before a loan will be approved. VA loans are funded through a traditional lender but guaranteed by the Department of Veteran Affairs.

Conventional Loans

Conventional loans do not involve a government entity in any way. They are made by lenders, banks, a savings and loan and credit unions. There are two major types of conventional loans.

Amortized Conventional Loans - This is a fixed-rate loan, however, one thing to keep in mind is the loan to value (LTV) ratios. If the LTV is higher that 80% lenders typically require that private mortgage insurance is paid.

Adjustable Conventional Loans - This is an adjustable-rate conventional loan. They can be set at a fixed interest rate for a specific period of time at the beginning of the loan and then have an adjustable rate that changes monthly, semi annually or annually.

Other Types of Home Loans

There are many more home loan products in addition to the traditional mortgage loans mentioned above. Here are some more options you may want to consider.

• Jumbo Loans
• Energy Efficient Mortgage
• Interest-Only Loans
• Affordable Housing Loans
• Balloon Mortgages

The Easiest Way to Determine Which Home Loan is Best

The easiest way to figure out which of home loan will work best for you and your financial situation is to find a good lender who has access to a wide variety of products. Ken Pederson, Certified Mortgage Planner/CMPS at FAIRWAY Independent Mortgage Corp, gives buyers this sound advice:

"The professional loan officer today will take the time to educate the buyer about the different products available and the pros and cons of each. Some buyers will easily fit into a no down payment loan program, low down payment and even a conventional loan. Which is best? Each buyer has a different situation and the professional loan officer should educate accordingly, discuss and show the buyer the pros and cons of each product based on their credit, payments, closing costs, tax benefits, PMI and possibly getting rid of PMI down the road and other important factors. 

Once these factors have been discussed and reviewed, the buyer has a much better opportunity to determine the best loan program for their short and long term housing and financial needs."

Now that you know about your loan options, it's time to find the right lender if you haven't done so already.