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Which Loan Is Right For You?

There are a number of choices.

You have many choices with regards to which type of loan may be best for you, depending on both your current financial situation and your future plans. Below we discuss some of the more common types. Which one truly best suits your needs is a topic you will want to discuss at length with your loan consultant.The majority of mortgages-loans fall into three categories: Fixed Rate, Adjustable Rate, and Hybrid Loans, which combine features of both.

Fixed-Rate Mortgage

With a Fixed Rate Mortgage your interest rate does not change for the term of the loan. Traditionally, Fixed Rate Mortgages have been the most common and popular choice with Homeowners when interest rates are low, as you can then secure a low interest rate. Fixed Rate Mortgages are most commonly in 30-year and 15-year terms.

Advantages: Your interest rate will remain the same despite negative fluctuations in the market.

The 30 Year Fixed Rate Loan vs The 15 Year Fixed Rate Loan

30 Year Fixed

Advantages: Lower monthly payments than a 15 Year Fixed.

Disadvantages: Higher interest rate than a 15 year fixed.

15 Year Fixed

Advantages: Lower interest rate than a 30 Year Fixed. Build equity faster in your home.

Disadvantages: Higher monthly payment than 30 Year Fixed.

Generally speaking, a Fixed Rate Mortgage, whether 15 year or 30 year, is a good choice when you plan on remaining in the property for a long time, say, for more than 5 years.

Adjustable Rate Mortgage (ARM)

Adjustable Rate Mortgages are different from Fixed Rate Mortgages in that the interest rate and monthly payment can change over time, depending on the market. This is because the interest rate for an ARM is bound to a nationally published index, like United States Treasury Bills (T-Bills), that may rise or fall over the course of the loan period. ARMs will normally have caps that protect the Homeowner by limiting how much the interest rate can increase over time. ARM loans have become the most popular alternative to Fixed Rate Mortgages, due to their low introductory rates and in-built protections.

Generally speaking, an Adjustible Rate Mortgage can be a good choice if you do not intend to live in the property for more than 5 years.

Hybrid Loan

Hybrid Loans combine elements of both Fixed Rate and Adjustable Rate Mortgages. A Hybrid Loan may start with a Fixed Rate for a certain period of time, and then later convert to an Adjustable Rate. It is important to check with your Lender so that you understand how much the rate may increase because some Hybrid Loans do not have caps for the adjustment period.

Typically Lenders charge lower introductory rates for Hybrid Loans.

Balloon Payment Loan

A Balloon Payment Loan refers to a loan that has a large, final payment due at the end of the loan. For example, there are currently Fixed Rate Loans which allow Homeowners to make payments based on a 30-year loan, even though the entire balance of the loan may be due (the Balloon Payment) after 7 years. As with some Hybrid Loans, Balloon Payment Loans may be attractive to Homeowners who do not plan to stay in their home more than a short period of time.

Time As A Factor In Your Loan Choice

As has been discussed, the length of time you plan to own a property may have a strong influence on the type of loan you choose. For example, if you plan to stay in a home for 10 years or longer, a traditional Fixed Rate Mortgage may be your best bet. But if you plan on owning a home for a very short period (5 years or less), then the low introductory rate of an Adjustable Rate Mortgage may make the most financial sense. In general, ARMs have the lowest introductory interest rates, followed by Hybrid Loans, and then traditional Fixed Rate Mortgages.

FHA and VA Loans

U.S. government loan programs such as those of the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for people who might not otherwise be able to qualify for a Conventional Loan. Both FHA and VA Loans have lower qualifying standards than Conventional Loans and often require smaller or no down payments.

Bear in mind, however, that FHA and VA Loans are not issued by the government; rather, the loans are made by Private Lenders but insured by the U.S. government in case the borrower defaults. Remember too, that while any U.S. Citizen may apply for a FHA Loan, VA Loans are only available to Veterans or their spouses and certain government employees.

Conventional Loan

A Conventional Loan is simply a loan offered by a traditional Private Lender. They may be Fixed Rate, Adjustable, Hybrid or other types. While Conventional Loans may be harder to qualify for than government-backed loans, they often require less paperwork and typically do not have a maximum allowable amount.

      

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