There’s no right or wrong way to finance a home mortgage. However, there certainly are better ways depending on how long homebuyers plan to own the home, the economic climate and the homebuyers’ history, which dictates their qualifications for different programs.
Adjustable-rate and fixed-rate mortgages are two of the most common financing options. In the last five years, loans from the Federal Housing Administration boomed in popularity, accounting for 28 percent of home loan volume in 2009. Choosing the best mortgage option requires the borrower’s foresight.
Adjustable-rate mortgages
By definition, interest rates change in ARMs. Lenders use one of many economic indexes to make the adjustments. Borrowers should find out which index a lender uses, how much and how often that index has fluctuated in the last few years. Borrowers prefer stable indexes that will keep rates from ballooning and shrinking. A popular type of ARM, the hybrid ARM, does not have an ever-changing interest rate.
Often, the terms of the ARM will come with a fixed-rate period of one, three or five years. One this duration ends, the loan hits its reset date and the interest rate changes, in many cases annually. ARMs appeal to borrowers because the initial interest rate is likely lower than fixed-rate mortgages. Some ARMs let borrowers refinance to a fixed-rate mortgage.
Fixed-rate mortgages
Again, the name says it all: During the life of the loan, the interest rate does not change. Fifteen-year and 30-year FRMs are common, but some lenders offer shorter and longer plans. Unless borrowers make monthly prepayments on a 30-year mortgage, they’ll pay significantly more in interest than with a 15-year FRM.
Borrowers inherently assume the interest rate risk. If rates spike, FRMs fare better than ARMs. But when interest rates dive, ARMs reward borrowers with smaller payments and FRM payments don’t change.
Federal Housing Administration loans
FHA loans are suited to help people with little or no credit history and no savings for down payments. As with most government loans, the government insures the loan against the borrower’s default, which reduces the risk that lenders assume against default. Borrowers with less than perfect credit, foreclosure or bankruptcy may still qualify for FHA loans. Interest rates with FHA loans vary within a fraction of a percentage of conventional loans.
Qualifications
Lenders typically look at an array of factors to determine which borrowers qualify for a certain mortgage plan. Income, credit history, outstanding debt and savings are the key variables that lenders examine.
For more information, please contact Michael Blumreich at michael@plus1-media.com
