Which Type Of Home Mortgage Loan Is Right For You?

An overview of mortgage loan choices and their pros and cons

In many cases, those who think they want to buy a home hold off because they don’t understand the options available to them when it comes to home loans. Understandably, not everyone can save up for a 20 percent down payment, which is why most lenders will offer choices to home buyers. For those of you thinking it’s time to venture into home ownership, what follows is an overview of the most common home loan types. Note that home loan availability is subject to credit approval, and that within each loan type, there may be several options that your lender can provide for you. We can help answer those questions and provide resources to help you make your final choice. Contact us to find out more.

Common Home Mortgage Loan Types

Conventional Fixed-Rate Mortgage

This one is relatively self-explanatory with no surprises. Home buyer receives a home loan at an interest rate that is guaranteed for the life of the loan.

Pros: Buyers who qualify for conventional mortgages usually are assured the best rate available (Based on approved credit). Also, home mortgage payment is fixed and will never change for the duration of the loan.

Cons: Usually requires 20% down payment. Also, should interest rates fall, you’re still locked in at the higher rate.

Adjustable Rate Mortgage

In this loan scenario, the interest rate is “adjustable”, meaning that it will start out at a nominal rate (in some cases lower than the current rate offered for fixed-rate mortgages), with periodic rate increases based on the loan agreement and market conditions.

Pros: Allows buyers to get into a home mortgage at a lower rate.

Cons: Rate will increase over time, which causes the mortgage payment to rise as well.

FHA (Federal Housing Authority) Mortgage

Buyers who may not otherwise qualify for a conventional mortgage can take advantage of this government-backed loan program that will allow them to purchase a home. In many cases, your lender can offer lower down payment options as well.

Pros: Allows opportunities for home ownership to those with less than perfect credit at a lower down payment.

Cons: The size of the loan may be limited. In some cases, Planned Unit Development Home Owner Associations may not allow FHA loans on their properties.

Interest Only Mortgage

This loan allows the buyer to pay only the interest on the loan and not the principal, which usually will provide a lower mortgage payment. The loan is for much shorter fixed term (usually between 1 and 10 years), and includes a balloon payment at the end of the loan term.

Pros: Lower mortgage payment.

Cons: None of the payments made applies to the principal of the loan, which will be due at the loan’s end term date. Balloon payment may be too high for the buyer to make.

VA (Veteran’s Administration) Loan

Offers loans backed by the Veteran’s Administration to those active duty and former military personnel who have served honorably, as well as surviving spouses. Loans usually do not require down payments and closing costs can be paid by the seller (Known as a “VA No-No”. No money down, no money at closing).

Pros: Offers military veterans the opportunity to own a home with little money up front at competitive rates.

Cons: The size of the loan is limited based on VA guidelines.

Balloon Mortgage

Very similar to Interest Only mortgages, except that the loan payments may also apply to the principal balance and not just the mortgage interest.

Pros: Lower mortgage payment.

Cons: Balance due at end of loan term.

Which loan is right for you?

If you’re considering purchasing a home, the best tool you have at your disposal is information. Montemayor & Associates will answer all of your questions about the home mortgage and home buying process at NO OBLIGATION.