January 26, 2007
You'll likely face many major decisions to make when you're ready to take the homeownership plunge, not the least of which is choosing the right kind of mortgage for your needs. Mortgage options used to be fairly limited, but in recent years new varieties have abounded.
Here are some of the more common types:
Fixed-rate mortgage. You make the same monthly payment throughout the term of your loan, usually 15, 30 or even 40 years. Shorter-term mortgages offer lower interest rates but higher monthly payments, so you may not be able to afford as expensive a house. However, over the life of the loan you'll pay thousands of dollars less in interest - and, you'll build equity in your home much more quickly.
Adjustable-rate mortgage (ARM). Your interest rate and monthly payment move up or down, depending on how the market index it's tied to performs. Initially, ARM interest rates are relatively low and don't change; then the rate becomes "adjustable" and may change at predetermined intervals, depending on market conditions. Warning: When rates climb, ARM payments can rise sharply, often by hundreds of dollars a month.
Interest-only loan. Usually ARMs, these loans require you to pay only the interest portion of the loan for a specified period - often 10 years. After that, you begin paying the loan principal amount at an accelerated rate.
Veterans Administration (VA) loans. Designed for honorably discharged, active-duty veterans, these loans feature no down payment, low origination fees and low interest rates. To see if you qualify, go to www.homeloans.va.gov.
Federal Housing Administration (FHA) loans. These loans are guaranteed by the FHA and offer low down payments and less-stringent credit guidelines than conventional loans. To learn more, go to www.fha.gov.
Subprime mortgages. People with damaged credit can sometimes secure these loans, albeit at much higher interest rates than "prime" loans. Subprime rates and terms vary widely because lenders weigh credit risk differently, so if you fall into this category, comparison shop - and do everything you can to improve your credit score so you can refinance later at a better rate.
Jumbo mortgage. If you need to borrow more than $417,000 to buy your home (except in certain higher-priced areas, where the limit is higher), you'll need a Jumbo mortgage; loans under that amount are called conventional mortgages. These dollar limits are set each year by Fannie Mae and Freddie Mac, the publicly chartered corporations that buy mortgages from lenders. Jumbo loans typically come with higher interest rates than conventional loans.
Balloon mortgage. These loans offer lower rates and payments for a specified term (usually three to 10 years); then a lump-sum payment of the principal balance becomes due. Balloon mortgages can sometimes be converted to fixed- or adjustable-rate loans, but borrowers often either sell their home or are forced to refinance.
There are many other mortgage variations out there. The main thing is to find a lender you can trust, either at a bank, credit union, Internet lender, mortgage broker or through your home builder or real estate agency. Bankrate.com features a handy guide Mortgage Basics, including a chapter on choosing the right type of lender www.bankrate.com.
Another good resource is Practical Money Skills for Life, a free personal financial management site sponsored by Visa Inc. www.practicalmoneyskills.com/homeowner. It contains a nine-step guide to homeownership, including preparations you should take to qualify for financing.
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